Lenders offer loans with bitcoin and digital currency as collateral | The independent
The misfortunes of one of the first bitcoin investors. Until recently, people who paid next to nothing for virtual currency and watched it soar had only one way to profit from their newfound wealth: to sell. And many were not ready.
Lenders on the fringes of the financial sector are now offering a solution: loans using a digital treasury as collateral.
As banks remain in the background, startups with names like Salt Lending, Nebeus, CoinLoan and EthLend are stepping into the breach. Some lend – or plan to lend – directly, while others help borrowers obtain financing from third parties. The terms can be onerous compared to traditional loans. But the market is potentially huge.
The price of Bitcoin has hovered around $ 17,000 (£ 12,648) for much of this week, giving the cryptocurrency a total market value of nearly $ 300 billion. About 40 percent of that is owned by something like 1,000 users. That makes a lot of digital millionaires who need homes, yachts, and sheepskin eye masks for $ 590.
“I would be very interested in doing this with my own holdings, but I have yet to find a service to enable this,” said Roger Ver, widely known as “Bitcoin Jesus” for his proselytizing on behalf of the cryptocurrency, in which he in one of the largest holders.
People controlling around 10% of digital currency would probably like to use it as collateral, believes Aaron Brown, former CEO of AQR Capital Management who invests in bitcoin and writes for Bloomberg Prophets. “So I can see a credit industry in the tens of billions of dollars,” he said.
One of the problems is that the price of bitcoin fluctuates violently, which can make holding it dangerous for lenders. This means the conditions can be steep.
According to David Lechner, chief financial officer of Salt, someone looking to get $ 100,000 in cash would likely have to provide $ 200,000 of bitcoin as collateral and pay 12-20% interest per year. ready.
This corresponds to the interest rates of unsecured personal loans. The difference is that the implementation of bitcoin allows people to borrow more.
The new loans should be of particular interest to miners, whose computers solve complex mathematical problems to obtain new coins and help confirm transactions, Brown said. They have to pay for electricity and equipment. But, like many bitcoin supporters, they don’t like to sell their crypto. Bitcoin startups also need cash to pay their employees.
Late last month, London-based startup Nebeus began helping third-party lenders offer loans backed by bitcoin and ether, another cryptocurrency. The company arranged nearly 100 such loans on day one, according to Konstantin Zaripov, the company’s chief executive. He has since made over 1,000.
Salt offers loans and plans to potentially help banks do the same. He is in talks with financial institutions and aims to strike a deal with at least one of them “within weeks,” Lechner said.
Some companies also require a second form of collateral. Terms can include maintenance calls, requiring borrowers to post more bitcoin if the price drops. This is similar to the margin that a dozen cryptocurrency exchanges already offer customers so that they can increase their trade bets.
In a twist, some lenders are hoping to use blockchains – digital ledgers similar to those that underpin bitcoin – to facilitate lending. The idea is to put the terms together in a ledger to help automate lending and collections. If they take off, the model could challenge peer-to-peer lenders – such as LendingClub, Prosper Marketplace and Zopa – by offering debt investors a more reliable repayment, according to Lucas Nuzzi, senior analyst at Digital Asset Research.
“While this has the potential to revolutionize credit markets, we are still in the very early stages of development,” said Nuzzi. “No company has been able to fully implement such a system. “
For now, banks are largely on the sidelines, reluctant to offer services that could let them hold bitcoins. Some companies don’t have a secure way to store cryptocurrency. And there is no established model for accounting for it in a regulated balance sheet.