In a move that could slowly yet surely change the lending industry, several financial institutions are offering loans with cryptocurrency as collateral.
While major banks are yet to comment on this, the suggestion and offerings are pouring in from startups that aim to revolutionize the lending mechanism by accepting collateral that is not in the form of physical property.
It could actually be a smart strategy since several early bitcoin enthusiasts (that went into buying Bitcoin when it was trading at a price which was virtually nothing as compared to its current standing) so far only had the option to sell the virtual currency in order to enjoy their newfound wealth. It was either that or keep the Bitcoins in their digital wallets so they could keep increasing in value.
Now, this third option could be a great option for such holders that do not want to completely part ways with their precious bitcoins but also want to enjoy the cryptocurrency’s success through something more gratifying than staring at the number of Bitcoins that they hold in their digital wallets.
Much of this week, Bitcoin’s price stayed around a whopping $19,000, giving the cryptocurrency a total market value of over $300 billion.
Around 40 percent of that value is reportedly held by around 1,000 users. That’s one of the market segments that these lenders want to reach out to and provide them with the liquidity that they seek while giving them the ability to hold onto their Bitcoins.
The new loans would also be enticing to miners whose exceptional skills are integral in processing transactions over the Bitcoin blockchain and also help in unlocking new coins. Unlike holders of the Bitcoin that actually purchased the cryptocurrency, miners obtain it by working for the bitcoin blockchain ecosystem. However, similar to several Bitcoin holders, they do not want to part ways with their Bitcoins as the currency keeps growing. That being said, they still have to pay for hardware and electricity in order to ensure smooth operations. Therefore, the option to utilize it as collateral could be of interest to them.
Salt is one of the lenders that are offering such loans. The chief financial officer, David Lechner, described the mechanism as somewhere along the lines of getting half the amount of the offered collateral in terms of a loan.
For instance, if someone is looking to obtain $150,000 in cash, they would need to offer $300,000 of Bitcoin in terms of collateral.
It would then require them to also pay an annual interest rate of 15 to 20 percent, which is along the same lines as the interest rates for unsecured personal loans. What differentiates this offering is that offering Bitcoin as collateral lets people borrow more.
Lechner further stated that Salt is currently reaching out to various banks in order to discuss the offerings with them. He hopes to have at least one of the major financial institutions to be on board in the near future.
It seems to be a growing market as well. Nebeus, a London-based startup, has been collaborating with third-party lenders by having them offer loans backed by Bitcoin and Ether. Since last month, the company has processed more than 1,000 applications of this very nature.
Potential Risks for Lenders
Since Bitcoin is known for the fluctuation in its pricing, it would pose a risk for lenders. This could translate to detailed and intricate terms of the loan.
Considering this, some companies also propose that they require a second form of collateral. Terms could also include a requirement for borrowers to put in more Bitcoin in case the pricing fluctuates for the cryptocurrency and affects the collateral asset.