Using Bitcoin as Loan Collateral
Way back in the early days of Bitcoin, which was really not that long ago at all, people were grabbing their coins for a couple of bucks a piece, or some super early adopters for less than a dollar each.
Imagine that some of those people held onto those coins, all through the ups and downs, and into today where bitcoin is hanging out trying to peak over the $20,000 line. They still haven’t sold, but the temptation is there.
So, what can a person who refuses to let go of their huge hoard of bitcoin do with that currency besides keep it or sell it?
Well, apparently they can now take out loans.
Bitcoin’s current market value, with the price around the $18,300 level, is nearly $315 billion. And, just like in “real” currencies, nearly 40 percent of that wealth is held by around 1,000 users. A lot of these individuals are not millionaires yet, but are slowly trickling their coinage out when they need it but hoarding the majority for the long run.
Startups are starting to take advantage of this market, as there are a surprising number of “whales” holding onto their coins for the future but would like to potentially purchase a nice house or start a new business without having to cash out on their coins. Standard banks, as always are in the case of cryptos, are lagging behind while companies like Salt Lending and CoinLoan are taking these clients on.
Rates for these types of loans currently are a bit rough. Someone looking to take $100,000 in cash would be giving the lender $200,000 in bitcoin as collateral, with about a 12 to 20 percent interest rate. This is according to David Lechner, the chief financial offer of Salt Lending.
Not all are the same, however, with some institutions requiring a second source of collateral or an agreement to put up more bitcoin if the price drops below a certain point before the loan is paid off.
Still, it is around what many are willing to put up for an unsecured personal loan and at least with bitcoin they can receive much more.
As an interesting side note, there are a few startups that are looking to take advantage of the blockchain itself to facilitate the lending operations. The basic idea will be used to attempt to challenge standard peer to peer lending operations by offering more reliable and transparent payments to debt investors.
These startups are trying to strike deals with certain financial institutions, to help them incorporate their way of lending with bitcoin as collateral into their standard procedures. However, there is a bit of wariness regarding this idea.
The main problem lies in the simple fact that the old models of doing business do not fit the volatility, security, and storage needs of having a “bitcoin vault” at their bank. As time goes on, there will be a cautious but optimistic first that breaks this trend. When that happens, expect a couple of thousand new yachts in the water from eager early bitcoin adopters.