“Downside Risk Explained”


When working with crypto loans, one particular question will often be brought up by beginners or those who want to weigh the pros and cons of the practice. That being “what is the downside risk should the value of my cryptocurrency decline?” Because the value of crypto regularly fluctuates, this inquiry is not completely unwarranted.


For some platforms, like Helio Lending, nothing will happen if the price of your crypto decreases during your loan. What matters is the price when your loan comes to an end. If the price winds up being lower than it was at the start, you could potentially lose your crypto. However, if you do lose your crypto, then paying back your loan isn’t necessary. You can keep the money.


What does it refer to?


For those who are new to lending or investments in general, you may not know exactly what the downside risk is. ‘Downside risk’ is the estimation of a security’s potential loss in value in the event of market conditions triggering a decline in the price of that security. Based on the measure that is used, downside risk elaborates on the worst-case scenario for an investment. Moreover, it indicates the amount that the investor stands to lose. Downside risk measures are seen as one-sided tests due to the fact that the profit potential is not considered.


Certain investments have a fixed amount of downside risk, while others have an infinite amount of risk. Purchasing a stock, for example, has a finite amount of downside risk that is bounded by zero. The investor can lose only their investment and nothing more. However, a short position in a stock, accomplished through a short sale entails limitless downside risk. This is because the security’s price could continually rise.


Can it be mitigated?


For lenders, there are different ways to work around downside risk. One is to plan for the worst outcome. Prepare for an uncertain future and set up protective measures to evade foreclosure, which is more costly than one would think. Lenders need to take a scenario where this loan isn’t paid back into consideration. When there is no repayment of a loan, lenders will have to pay the transfer taxes and take on the other costs associated with the loan that the borrower was supposed to pay.


Another method is to not throw good money after bad. Lenders typically don’t want borrowers to make late payments or request certain concessions and you are trying desperately to avoid foreclosures. You, as a lender, should save yourself from all the wasted time and money that could come from underwritten loans with poor structures. Keep a close eye on your borrowers and the asset you are lending.