Updated on January 9, 2022
Next review – is this a sensible option for your money? This article will shed light on that issue.
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Introduction:
Let us have a brief look at the terminology related to cryptocurrencies and crypto loans before we dive into the main topic of today, which is ‘Nexo’. The main objective of discussing these terms is to have a better understanding of the concept.
Cryptocurrency
First and foremost thing that we are going to discuss is ‘Cryptocurrency’. Starting with the definition, Cryptocurrency is nothing but a digital currency, which is used to make transactions online.
The most famous, and original, digital currency is Bitcoin, but plenty have came after.
The operation of cryptocurrencies happens in such a way that they make use of a localized technology, with the help of which, users can be able to make transactions online or store money online.
For this, they won’t require the specific name of the user or a specific bank.
They operate based on a public ledger known as ‘Blockchain’. Blockchain is a digital record of all the transactions that have been made. The transactions are regularly updated and kept under the possession of the currency holders.
Using cryptocurrency comes with a great set of advantages such as not being able to fake the currency, spend more currency than there actually exists, encryption, resistance towards inflation, transparency, etc.
However, along with the advantages, there are quite a few disadvantages as well.
Some of the major disadvantages include their usage for illegal activities, volatility in the currency conversion rate, vulnerabilities in the structure upon which they are designed, etc.
For a better understanding, they can be considered as casino chips or videogame coins and used to purchase goods or services or make transactions online.
Depending on the current price value during that specific time, they can be cashed out. In order to buy cryptocurrencies, a person is required to have a wallet, using which an individual is able to convert real cash into cryptocurrencies.
Cryptocurrencies are known to have the highest volatility in price which can sometimes fluctuate very high that nobody could expect.
However, they might even become low than that of the actual price that a person has bought them for.
Bitcoin – Bitcoin, first founded by ‘Satoshi Nakamoto’ in the year 2008, is the first-ever cryptocurrency that came into existence.
In March 2010, the value of a bitcoin was around $0.003, which is basically a very small amount.
But beyond the wildest imaginations, the value went up to $19,783 in 2017, which was a very astonishing thing that could ever happen.
Now, in 2020, the price is around $9,000 half that of the price in 2017. This is the best example to explain the fluctuations in the price of a bitcoin.
According to the details presented by ‘Coin Market Cap’, nowadays there are more than 5,500 (approx.) cryptocurrencies available to the people in the market.
The overall market cap is estimated to be more than $271 billion. However, some of the major cryptocurrencies that are known world-wide are ‘Bitcoin (BTC)’, Ethereum (ETH)’, ‘Tether (USDT)’, ‘XRP or Ripple (XRP)’, ‘Bitcoin Cash (BCH)’, ‘Litecoin (LTC)’, etc.
Fiat Currency – ‘Fiat Money’ or ‘Fiat Currency’ is the general type of currency issued by the respective country’s government and isn’t backed by any sort of physical commodities such as precious metals like gold or silver. Some of the major fiat currencies are the advanced and modern currencies such as US Dollar, the Euro, etc.
Fiat money generally provides power over an economy to the respective government. This happens as the government decides how much money can be printed. However, in the case of printing it too much, hyperinflation can occur.
Stablecoin – ‘Stablecoins’ are the type of cryptocurrencies that very less volatile when compared to the cryptocurrencies as the market value of stablecoin is pegged by an external reference.
For example, stablecoins can be backed by currencies such as the US Dollar or a physical commodity such as Gold.
The price stability of stablecoins is achieved through the collateralization or the existential algorithmic mechanisms used to buy or sell the reference commodity or its derivative. In case of drastic changes that might occur in this type of currency, the relevant authorities take action in such a way that the price stability of the currency is maintained.
What is a Crypto Loan:
Crypto Loans – As we have already discussed cryptocurrency and its usage, it is quite easy to understand the topic ‘Crypto Lending’.
Borrowing- In general, people who want to borrow fiat money or stablecoin can use cryptocurrency as collateral against their loan. This is advantageous to users who need money, yet, don’t want to sell their crypto assets. The assets used as collateral by the users are returned to them once the loan amount is repaid.
Similarly, people who want to borrow money in the form of a cryptocurrency can be able to obtain it by using fiat money or stablecoins as collateral. People can also be able to obtain a loan in one form of cryptocurrency by using another form of cryptocurrency as collateral. This can be demonstrated in the example given below.
An example provided for a better understanding – This example is just for the demonstration of the procedure of crypto loans and the actual assets may vary depending on the lending platform.
For example, if a person named ‘A’ is willing to obtain a loan in the form of fiat currency such as Euros.
The person has an equivalent amount in the form of cryptocurrency such as Bitcoin.
Then the person can use the amount in Bitcoin as collateral, without having to sell the actual assets that he possesses and be able to obtain a loan in the form of fiat money or stablecoin.
If he has fiat money or stable coin such as Euro and wants to obtain a loan in the form of a cryptocurrency such as Bitcoin, then he can use the fiat money as collateral and obtain a loan.
If the person ‘A’ has assets in the form of a Bitcoin and wants to obtain a loan in the form of another cryptocurrency such as Ripple, then he can use his Bitcoin assets as collateral and be able to obtain the loan he wants.
Lending – People who do not want to borrow money from a crypto lending platform and instead, they want to lend money, they can be able to do that. They are also paid interest from their assets. The Crypto lending platforms, in most cases, act as a middleman between the lenders and borrowers and circulate the assets.
Types of crypto lending platforms – Generally, there are two types of crypto lending platforms, i.e., ‘Centralized’ and ‘Decentralized’.
Centralized lending platforms are the renowned traditional fintech companies that are involved with cryptocurrencies. Centralized crypto lending platforms are known to provide a higher rate of interest to the lenders having assets like Bitcoin (BTC) or Ethereum (ETH) when compared to the decentralized crypto lending platforms.
They happen to be involved in processes such as Know Your Customer (KYC), Custodial system for the protection of assets, etc., which make a little bit hard to be accessed by anybody.
Decentralized lending platforms on the other hand do not require any process like KYC or a custodial system and can be accessed by anybody. Some examples of the crypto projects included in the decentralized crypto lending platforms include Maker, Compound and dYdX.
Decentralized lending platforms tend to have fluctuating interest rates depending on the demand and supply of the respective assets used on the platform. There is however an exception for Maker, whose decentralized governance system actually controls interest rates.
Huge fluctuations in the interest rates can be observed based on the demand for the assets. For example, sometimes interest rates for lenders for dYdX can range as much as 30%.
Risks of Crypto Lending – The major risks while dealing with crypto loans are as follows:
- Borrowers, who make use of the crypto loans should always be careful as there are high chances of a decrease in the value of their collateral assets. This leads to paying more money than that they actually borrowed. People should be cautious in order to avoid this situation and maintain their collateral ratio under a safer range.
- Even though the performance of the liquidation systems has been proven to be exceptional, there are chances that even lenders might experience losses on their investments. However, such cases haven’t been seen on a regular basis.
- Decentralized opportunities might sometimes lead to a situation with lower liquidity, experiencing radical changes in the rates due to large amounts in a specific asset being entered or moved out of the system. Although the interest rate functions happen to be designed in order to encourage a fair balance, volatility is unpredictable.
- Last but not least, an individual dealing with the crypto loans should have a keen eye for the tax issues and the regulatory risks involved. The main reason for this is that, in most cases, borrowing loans is related to avoiding taxation from the authorities. Most decentralized platforms being operational without having a valid license or not having the requirement for KYC documents leads to making them violate certain types of regulations and can affect the individuals in the future.
- Decentralized platforms also lack technological advancement to sustain threats posed by hackers. There is a possibility of hackers being able to attack a platform with the help of a bug or a virus as the capital flow is done within the system with the help of computer code.
Having said that, let us take a detailed overview of Nexo while discussing the advantages and disadvantages of availing the services offered by them.
Nexo:
Nexo – Nexo is an advanced and automated loan platform for instant crypto loans. It allows the users to avail loans within crypto-to-crypto or crypto-to-fiat without requiring the user to have to sell their existential crypto assets. I
t happens to be the only blockchain company that provides services in 200 countries with an availability of more than 45 fiat currencies. It was founded in the year 2017.
Nexo has a parent company, which is a European fintech company namely, ‘Credissimo’ that is regulated in the EU (Malta).
The financial statements of Credissimo are audited by ‘Deloitte’, which happens to be one of the biggest accounting firms in the world. it has been operating as a lending services provider since 2007.
The majority of the people who avail the services offered by Nexo are investors, traders, crypto companies, hedge funds, cryptocurrency miners, etc. The main services offered by Nexo are as follows:
- Crypto Loans – with the help of Nexo, people can be able to obtain a loan against their cryptocurrency (as collateral) and get stablecoins or fiat money get directly deposited into their bank accounts.
- Interest Accounts – people who want to lend money can be able to earn compound interest on the deposits made by them in the form of Euro or stablecoins. In the not so distant future, Nexo might also be able to avail interest accounts for people who deposit in the form of cryptocurrencies such as Bitcoin, Ethereum, Ripple, etc.
Key features of Nexo – Some of the considerable aspects within the services provided by Nexo are as follows:
- First of all, Nexo is in compliance with the Securities and Exchange Commission (SEC) and is operating under the supervision of European Banking and Financial Service Regulators.
- It is considered to have a secure login feature that requires two-factor authentication for logging in. User credentials are secured with the help of SSL technology.
- The crypto assets belonging to the clients at Nexo are stored in a secure manner by BitGo, which is a standard custodian that is insured by Lloyd’s of London and also insured for an amount up to $100,000,000 USD.
- Nexo offers loans using various types of crypto assets such as Bitcoin, Ethereum, Ripple, Nexo, Binance Coin, Litecoin, etc., as collateral.
- Holding the crypto assets for a substantial amount of time in certain countries can lower the taxes.
- The process of securing a crypto loan at Nexo is fully automated and hassle-free.
Wallet – Nexo makes use of a wallet, with the help of which customers are able to deposit their crypto assets. All the crypto assets that have been stored in the Nexo wallet are encrypted using 256-bit military-grade encryption and stored in multi-signature wallets obtained with the help of BitGo.
People wishing to acquire dividends on their Nexo token holdings must complete their KYC and safeguard their tokens in this wallet.
Credit Card – Nexo also provides a cryptocurrency credit card to the users. The credit limit and Nexo account are directly linked to the individual’s credit card giving them access to use the funds without having to withdraw them into a bank account.
Regarding the credit card, people possessing a Nexo credit card can be able to use it just like they use a standard credit card. People who make payments using the Nexo credit card can also avail cashback of 5%.
The limit for the loan that can be availed depends on the funds that exist in the customer’s Nexo account. These range in between $500 to $2,000,000. People who fail to repay the loans in time will get their collateral deducted from their account.
The credit card offered by Nexo is a Master Card, therefore, it is not as efficient as the Visa card (which has some exclusive features). However, it is better when compared to the American Express card.
Jurisdictions – Currently, Nexo accepts transfers that are made in the form of fiat money only in the following jurisdictions, which are ‘Åland Islands’, ‘Austria’, ‘Australia’, ‘Belgium’, ‘Bulgaria’, ‘Canada’, ‘Cayman Islands’, ‘China’, ‘Croatia’, ‘Cyprus’, ‘Czech republic’, ‘Denmark’, ‘Estonia’, ‘Finland’, ‘France’, ‘Germany’, ‘Gibraltar’, ‘Greece’, ‘Guadeloupe’, ‘Guernsey’, ‘Hong Kong’, ‘Hungary’, ‘Iceland’, ‘India’, ‘Ireland’, ‘Isle of Man’, ‘Israel’, ‘Italy’, ‘Japan’, ‘Jersey’, ‘Latvia’, ‘Liechtenstein’, ‘Lithuania’, ‘Luxembourg’, ‘Malta’, ‘Martinique’, ‘Mayotte’, ‘Monaco’, ‘Netherlands’, ‘New Zealand’, ‘Norway’, ‘Poland’, ‘Portugal’, ‘Réunion’, ‘Romania’, ‘French part of Saint Martin’, ‘Singapore’, ‘Slovakia’, ‘Slovenia’, ‘South Africa’, ‘South Korea’, ‘Sweden’, ‘Spain’, ‘Switzerland’, ‘Taiwan’, ‘UK’ and the ‘USA’.
Any person from a jurisdiction that is not mentioned in the list above might be actually rejected on their payments and can lead to additional bank charges as well.
LTV (Loan to Value) – To determine the amount, which can be borrowed by the user at Nexo, they make use of a ‘Loan-to-Value’ system. This is also referred to as the ‘LTV’ system. The primary functionality of the LTV system is to draw credit lines depending on the funds (security deposit/collateral).
In general words, it is nothing but the ratio between the loan and collateral. It is calculated as the (USD) loan amount divided by (USD) collateral amount and usually represented in the form of a percentage.
In order to explain this, we have provided a small example below:
For example, if the loan amount is $400 and the collateral value is $500, then the LTV would be calculated as $400/$500 * 100, which is 80%.
The LTV value can experience fluctuations depending on the changes in the crypto market. When the value of the collateral becomes less due to the changes in the market, the value of LTV increases.
Upon the LTV reaching a certain limit, let us say 83.3%, the company begins to sell the crypto asset in order to rebalance the loan obtained. This is only done after the information is sent to the customer. However, the customer can be able to refill their crypto assets in order to rebalance the LTV (depending on the assets that will be deposited).
The collaterals accepted and the LTV ratios for Nexo are as follows:
- PAX Gold (PAXG): LTV – 75%
- Bitcoin (BTC): LTV – 55%
- Ethereum (ETH): LTV – 50%
- XRP (XRP): LTV – 40%
- Bitcoin Cash (BCH): LTV – 30%
- Binance Coin (BNB): LTV – 30%
- Litecoin (LTC): LTV – 30%
- EOS (EOS): LTV – 30%
- Stellar (XLM): LTV – 30%
- Nexo (NEXO): LTV – 15%
Nexo Token – The Nexo Token can be used to decrease the interest rate payments by half rate. Nexo has an annual interest rate which is generally 5.9% for both USD and USDT assets that have been borrowed. This interest can be reduced with the help of a Nexo token. However, this is only applicable if an individual makes use of the Nexo tokens as collateral or as a medium of repayment.
There are, however, some terms and conditions applicable to it in order to acquire the 50% discount. For example, a customer would have to obtain enough Nexo tokens that can be able to cover for the repayment from the starting to ending including the interest rates.
Loan Process – The loan process at Nexo is as follows:
- Sign up and create an account at Nexo.
- Complete the KYC process by submitting all the necessary documents. Generally, the documents consist of a Government ID or Passport as a verification picture (Selfie).
- Make a deposit in the form of the crypto assets supported at Nexo. Nexo currently supports ‘BTC’, ‘ETH’, ‘XRP’, ‘LTC’, ‘XLM’, ‘BCH’, ‘EOS’, ‘TRX’, ‘NEXO’, and ‘BNB’. They also accept a selective range of stablecoins as well. Upon successfully depositing the crypto assets, they will be stored in the secure and insured wallet of Nexo.
- Go to the ‘My Profile’ section and then complete the basic as well as the advanced verification process.
- Nexo issues a credit line depending on the current market price of the crypto assets. However, up to 50% of the value of the collateral/deposited crypto assets (LTV) can be utilized immediately by the customer.
- Go to the ‘Withdraw Loan’, where you can be able to see the amount available for you to be borrowed.
- Choose the preferred withdrawal method whether it be a bank account or a Tether address. Customers are able to withdraw funds to the Tether (USDT), which is a stablecoin, and be able to use it instantly with the help of a debit card or withdraw the funds to their bank account by using wire transfer.
- Interest amount is usually deducted from the available credit limit and the repayments of the loan can be made whenever the person wishes to repay (with the help of crypto, fiat, or both of them).
Why do we consider Nexo to be disadvantageous?
Major Disadvantages of Nexo – As we have discussed all the general details about Nexo, we intend to say that Nexo might not be a very good opportunity for the users. Given below are the details to justify our statement.
- Nexo makes a proud statement that there is an insurance cover for the assets in their platform up to $100 million. However, if we take a closer look, we might be able to observe that the overall assets stored in the platform might range way more than that.
Adding to that, the fiat money at Nexo is not all insured by that insurance cover as it only covers for the crypto assets that have been stored. This means if a large sum has been deposited in the form of fiat money and the company experiences a fall, then you can say bye-bye to your assets.
- If a person deposits in the form of euros, then they are converted to EURx, which is a Euro stablecoin. According to general logic, they should be insured for whatever happens to them, but they apply the insurance cover only on some primary things such as theft.
- Everybody should consider that Cryptocurrency and Blockchain system has always been a place filled with illegal activities, scams, scandals, etc. Therefore, the safety of the assets cannot be guaranteed.
- Just as an example, if one day, all the countries in the world wish to stop using the cryptocurrencies and eradicate them, then the people who have stored their money in the form of crypto assets would be highly affected. However, it is just an assumption and based on a logical point of view that such things won’t happen.
- Cryptocurrencies can actually fluctuate in such a way that nobody could ever expect. For example, on 2nd December 2017, the price of Bitcoin was somewhere around $10,000 and within a few days, on 15th December 2017, it went up to a double rate reaching approximately $20,000. However, within a week, it became $15,000. This type of wild fluctuations can affect the person who has stored their money in the form of crypto assets.
Crypto assets are not such a good idea when it comes to storing money. The above-mentioned situation is an excellent example of that. This may seriously affect the people if their collateral experiences a price drop and reaches the LTV threshold. If it happens so, the company would sell the assets in order to maintain the balance in the LTV ratio value.
- Individuals are not able to earn interest on their deposited crypto assets, which are not present in the form of stablecoins.
- The interest that can be earned with the help of stablecoin deposits is relatively low when compared to most other platforms in this field.
- Nexo is a centralized crypto lending platform. This makes the assets stored in the platform subject to the government regulations and the policies of the company.
- Privacy of the customer cannot be maintained properly as the people who want to obtain fiat loans by depositing crypto would have to submit their details during the KYC process.
- Nexo allows its users to obtain a loan using highly volatile assets as collateral. This is extremely risky as the volatility of the asset can fluctuate any time and the people who couldn’t monitor their loan agreement would have to face problems because of this.
- The Nexo raised $52 million in order to issue their native Nexo token to the contributors. However, there is not enough value provided to the users on this and many other platforms (for example, BlockFi) are performing similar to Nexo even after not having such native tokens.
- People who use Nexo are not able to buy cryptocurrencies within the app. They are also not able to exchange currencies. This is disadvantageous to most users.
- Deposits and withdrawals cannot be made with the help of a bank account or a credit card or a debit card. People should only make use of the Wire Transfer and Cryptocurrency transfer options.
- A security breach or the bursting of the crypto bubble or any other competitor is leading in the market are also some of the noticeable issues.
- Loans offered at Nexo are overly collateralized. Most other platforms might be able to offer loans without having the necessity of much collateral. The interest rates at some of the decentralized platforms is also very attractive and beneficial to the customers.
Final Verdict:
Nexo has some benefits along with disadvantages. After some thorough research, we were able to find some bad reviews about Nexo that described many issues.
People who want to borrow from Nexo or lend using Nexo should carefully go through the above-mentioned information and only proceed if they find it beneficial as per their financial conditions.
People who want to put their assets into work and avoid making them ideal should find some other alternative methods other than storing their money in the form of a cryptocurrency in Nexo. If you require any further details regarding this, please feel free to approach us.
It is our view that Bitcoin isn’t really an investment at all, and is more of a speculation.
Further Reading
Best Investment Options for Australian Expats in 2023 evaluates lucrative investment opportunities, akin to insights provided in the Nexo Review 2022.
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