> In a traditional banking world businesses take a loan either to cover for a short-term cashflow crunch (example an invoice that's delayed by their client) or for longer term investment. That money usually goes into economic activities which are expected (hoped?) to bear fruit to repay the loan.
There's another option in the traditional world that also makes sense in the crypto-world:
People typically borrow shares of companies so they can sell them short. When the loan comes due, they 'cover' their short by buying the stock again. (So in some sense, the share that you give back is not the share you borrowed in the first place.) If the share drop in value between the sale and the covering buy by more than the borrowing costs, the short seller makes money.
Taking a crypto-loan would be one way to short-sell a specific crypto-currency.
Those crazy interest rates you mention are relatively normal for hard-to-borrow stocks with a lot of short interest.
Shorting stock is perfectly legitimate, and the proceeds from the short-sale usually sit with your broker as collateral for the borrow. In that sense, they don't go into 'economic activities which are expected (hoped?) to bear fruit to repay the loan'.
In practice, I suspect that most crypto-loans are not for short-selling purposes, but closer to what you suggest.
> The music has got to stop at some point.
Funny thing is, heavy short selling is one way for the music to stop earlier. And short selling needs exactly the kind of borrowing we decry here.
(Just to be perfectly clear: short selling by itself doesn't cause a collapse in value; Tesla hasn't collapsed after all. But short selling is a way for people who predict a drop in value to profit when their prediction comes true. Thus incentivising to add their information into the market price.)
There's another option in the traditional world that also makes sense in the crypto-world:
People typically borrow shares of companies so they can sell them short. When the loan comes due, they 'cover' their short by buying the stock again. (So in some sense, the share that you give back is not the share you borrowed in the first place.) If the share drop in value between the sale and the covering buy by more than the borrowing costs, the short seller makes money.
Taking a crypto-loan would be one way to short-sell a specific crypto-currency.
Those crazy interest rates you mention are relatively normal for hard-to-borrow stocks with a lot of short interest.
Shorting stock is perfectly legitimate, and the proceeds from the short-sale usually sit with your broker as collateral for the borrow. In that sense, they don't go into 'economic activities which are expected (hoped?) to bear fruit to repay the loan'.
In practice, I suspect that most crypto-loans are not for short-selling purposes, but closer to what you suggest.
> The music has got to stop at some point.
Funny thing is, heavy short selling is one way for the music to stop earlier. And short selling needs exactly the kind of borrowing we decry here.
(Just to be perfectly clear: short selling by itself doesn't cause a collapse in value; Tesla hasn't collapsed after all. But short selling is a way for people who predict a drop in value to profit when their prediction comes true. Thus incentivising to add their information into the market price.)