Potential of Fixed-Term-Loans in Bearish Market

fixed-term crypto loans potential in bearish market

SmartCredit.io is a Decentralized Finance (DeFi) crypto lending platform focusing on fixed-interest loans and fixed-term loans. More than 4,500 users have registered already with SmartCredit.io.

But how does the borrower benefit from fixed-term and fixed-interest loans in the bearish market?

There are multiple use cases for fixed-term loans. This article focuses on one of the use cases—fixed-term loans for bearish market strategies. 

The following topics are analyzed:

  • What are Bearish Market Trading Strategies?
  • What are DeFi fixed-term loans?
  • How do you borrow fixed term in SmartCredit.io?
  • How do you implement bearish strategies?

What are Bearish Market Trading Strategies?

Bearish strategies are based on bearish views on specific assets. Let’s assume the investor has the market view that ETH is going down.

The investor could then use the Centralized Exchanges—for example, Bitfinex or Binance. He could add initial equity into his margin account; he could borrow ETH and then go short on the ETH (sell ETH for stablecoins and repurchase it at a lower price later). This all sounds nice, but the margin assets and stablecoins are all in the custody of the exchanges. If the maintenance margin declines to a certain fixed ratio, then the position is liquidated.

The issue with the central exchanges is that they control your asset, and you have a claim on your assets instead of controlling your assets.

The good news is one can implement the same trading strategy in the DeFi world too. The trader could do the following:

  • Use Money-Market Funds and borrow ETH against the collateral coins
  • Sell ETH in DEX’s for stablecoins
  • Repurchase ETH later
  • Pay the loan and receive back the collateral

What could be the entry points for this strategy?

The following chart describes some entry points for the ETH—one could monitor the 4-hours chart and the RSI on this chart. When the RSI hits the higher limit, then these are the entry points:

Bearish Strategy
Bearish Strategy

For this strategy to work, one should keep the stablecoins for a longer period—till he gets the exit signal from the market. For example, when the RSI hits the lower limit.

But the trader will have an issue with the interest rates—what he has to pay. It’s because the Money-Market Funds have fluctuating interest rates—the interest rate is set via the “utilization formula” at every block, and it can be quite volatile. Here is the screenshot of fluctuating interest rates at the time of writing:

LoanScan - Fluctuating Interest Rate
LoanScan – Fluctuating Interest Rate (Source: https://loanscan.io/earn/historical?interval=3m)

The issue here is that other investors would do the same, which would drive the interest rates. Market moves are often based on market moods; this results in herding movements.

This means Money-Market Funds are not good for implementing bearish strategies—the investor will not know how much he needs to pay the interest…

However, there is an alternative—that’s the fixed-term, fixed-interest loans that SmartCredit.io offers. The investor would borrow from the Fixed-Income Fund, and he would pay the fixed interest rate for his loan. The investor would no longer be exposed to fluctuating interest rates.

What are DeFi fixed term Loans?

The key ideas of fixed-term loans are:

  • The loan term is fixed, and
  • The loan interest is fixed too

Both borrower and lender will know their future obligations/future revenue streams. Both know when they have to pay/will receive the payments. Fixed-term loans give stability for both lender and borrower.

The opposite of fixed-term loans is the Money-Market Funds with variable term loans and fluctuating interest-rate loans. This means the borrower has flexibility on the loan term, but he doesn’t know how much interest he will pay. It’s like taking credit for 30 days but not knowing how much interest has to be paid—it can be a small amount, but it can be the opposite too.

SmartCredit.io offers fixed-term and fixed-interest-rate loans. The interest depends on:

  • The loan duration—longer-duration loans have higher interest rates and vice versa (they are based on the internal interest rate curve or the yield curve).
  • The borrower’s credit score—the borrower can reduce his interest rate by completing the optional credit scoring procedure.

The SmartCredit.io crypto credit score enables monetization of the borrower’s data:

  • The borrower can choose to stay fully anonymous, but he will then end up paying more interest (and he will have a higher collateral ratio too).
  • Or the borrower can choose to open up his data, and he will receive monetary benefit from this in the form of a lower interest rate.

How to borrow fixed term in SmartCredit.io?

It’s easy—the following steps are required:

  • The borrower can use a loan calculator and calculate how much he can borrow, which collateral to use, and what loan term he would like to have.
  • The borrower has to submit the loan request and add the collateral.

The following collaterals are supported for fixed-term loans

  • Basic Attention Token – BAT
  • Bancor – BNT
  • Crypto.Com – CRO
  • Enjin Coin – ENJ
  • Houbi –  HT
  • ChainLink – LINK
  • Loopring – LRC
  • Maker DAO – MKR
  • Nexo – NEXO
  • Okex – OKB
  • Augur – REP
  • Uniswap – UNI
  • 0x Token – ZRX

If the borrower is not repaying his fixed-term loan at the end of his loan, the system will liquidate his collateral. The borrower can claim back the remaining funds from the liquidation.

The borrower’s fixed-term loan requests are matched with the lender’s Fixed-Income Funds or with the active lenders who accept the loan requests manually. The matching is done on the costs of the platform. The platform charges a 0.5% fee from the loan volume to cover the gas costs.

How to benefit from Bearish Market Strategies with fixed term loans?

The procedure for the borrower/investor is as follows:

  • Borrow ETH with a fixed interest rate for a fixed term.
  • Monitor the price action (for example, for ETH) and choose the entry points based on your trading strategy (for example RSI based).
  • Sell ETH at the entry points and continue monitoring the price action for the exit points.
  • Exit the positions at the exit points of your trading strategy.
  • Pay the fixed term loan principal and interest.

The difference from using Money-Market Funds is that the investor will know how much interest he needs to pay. He will no longer be exposed to fluctuating interest rates.

Summary

This article described how to benefit from fixed-term and fixed-interest loans for Bearish Market Trading Strategies. The advantage of using fixed-term loans is that the borrower will know his interest costs in advance. He can calculate the estimated returns from his strategies. This is not possible when using Money-Market Funds with fluctuating interest rates.

This information is provided for educational purposes and is not financial advice.

Additional information

For more information, please use our application

SmartCredit.io Application

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