The Investor’s Guide to Crypto Credit Cards

A quick primer on crypto credit cards

Crypto credit cards are very similar to any other credit card. You make purchases using a line of credit, earn rewards, and pay back what you owe at a certain interest rate. What makes crypto cards different is they give you a direct line of credit by using your digital assets as collateral, removing the need for a credit check.

The inability to use cryptocurrency to buy everyday goods is a common criticism. But with crypto credit cards, the user doesn’t notice a difference at the Trader Joe’s checkout line. That direct line of credit can offer instant liquidity of their crypto portfolio. 

The difference between crypto credit and crypto debit cards

Crypto debit cards work much like a traditional debit card. Users fund their account with stablecoins, bitcoin or altcoins. And when they use it at their local Gamestop, the card sells the equivalent value of their assets in exchange for the USD needed to make the purchase.

The main difference between the two is that crypto credit cards allow you to borrow funds for purchases and debit crypto cards sell your assets immediately whenever you make a purchase. 

The case for crypto cards

On a recent episode of Empire, Jeff Dorman reminded us that 20 years ago, people were afraid to put their credit card in a machine. Today we can’t imagine our lives without these magic rectangles. With some countries adopting bitcoin as legal tender and innovations like crypto cards, the question of wide adoption is not if, it’s when. But this inevitability is not the only reason to use a crypto credit card.

Earn crypto rewards

There are many rewards cards giving cash back, travel points or other kinds of loyalty points for goods and services. Crypto credit cards offer rewards in crypto. This is a great way to stack sats or other cryptocurrencies without having to buy them on an exchange. While rewards differ from card to card, it’s easy to see the potential upside when crypto has a history of appreciating over time and fiat has a history of decreasing in value.

Bridge TradFi and DeFi

In the last several years, crypto adoption has shot through the roof, mirroring the adoption curve of the internet back in the ’90s. But even today, it can be difficult for new users to understand how to get started with digital currency. Crypto credit cards are a familiar way for people to begin investing in crypto without having to spend weeks educating themselves about the ecosystem. What Robinhood did for stock investing, crypto credit cards can do for crypto adoption.

Adoption barriers to crypto cards

The taxable event

Most crypto cards create a taxable event every time you make a purchase. Because most governments classify cryptocurrencies as property instead of foreign currency, they are subject to capital gains. So if you were to use a crypto debit card to buy a $5 mothers day card and your portfolio is up 100%, that gesture will have an expensive tax bill. 

Price volatility 

Many investors are hesitant to use crypto cards because of major price swings and volatility. They not only want to avoid paying capital gains, they want to avoid missing out on potential gains. This mindset is why many view crypto largely as a store of value rather than a currency. This is why platforms such as Nexo are innovating ways investors can use their crypto without missing out and paying capital gains each time they make a purchase.

How the Nexo card works

What makes the Nexo card unique is how it incentivizes HODLing. Using Nexo’s proven, crypto-backed lending service, Nexo card holders can utilize a line of credit to make fiat purchases without actually selling their crypto. Not only does it allow them to keep valuable assets, it won’t trigger a taxable event by selling crypto to make fiat purchases as is the case with other crypto cards. And as an added bonus, every transaction with the card pays back up to 2% in crypto rewards.

What is crypto-backed lending?

The way Nexo uses crypto-backed lending as a line of credit is a first for crypto cards. To understand a little more, here’s how lending works.

P2P and trustless

Unlike in the traditional financial system, crypto-backed loans are peer-to-peer and trustless. You don’t have to apply to a loan institution, have your credit score checked, get approved, or trust a centralized company. If you have collateral, you’re able to borrow. Crypto-back loans tend to be over-collateralized for this reason, opening borrowing opportunities to more people.

Automated smart contracts 

Because crypto-back loans use smart contracts which execute automatically, they’re as strong as the code itself. They also have lower fees than traditional loans because there’s no intermediary taking a cut.

Maximize purchasing power

With lower fees and potential for the collateral to appreciate over time, crypto-backed loans maximize purchasing power. If you’re borrowing against your crypto portfolio without selling the underlying asset and its value goes up, your borrowing maximum will also go up.

Final considerations

Fiat isn’t going away yet, and crypto needs to become practical for everyday users. Crypto credit cards are doing that. 

As with all investments, there are risks that should be carefully considered. Under-collateralization could trigger loan liquidation and crypto volatility can drive investors to seek higher interest yields, but taking risks into consideration, companies like Nexo are offering new and innovative ways to change the crypto credit card landscape.

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This Investor’s Guide is sponsored by Nexo.

The content of this webpage is not investment advice and does not constitute any offer or solicitation to offer or recommendation of any company, product or idea. It is for general educational purposes only and does not take into account your individual needs, investment objectives or specific financial circumstances.