Thriving on bitcoin’s bust, lenders aid both fanatics and shorts

As a growing number of cryptocurrency ventures struggle for funding, cut staff or shut down, all is well in one small corner of the industry: lending.

Creditors focusing on the crypto arena say they’re finding strong demand from borrowers who don’t want to sell their virtual coins at depressed prices, as well as from big investors eager to borrow coins for short selling. It’s putting lenders on both sides of Bitcoin’s bust: Helping believers pay their bills while awaiting a rebound, and also enabling bets by people who think the drop has further to go.

BlockFi says its revenues and customer base have grown 10-fold since June, when Michael Novogratz’s Galaxy Digital Ventures invested $52.5 million. Aave, which owns online crypto-lending marketplace ETHLend, just opened an office in London, plans to enter the U.S. soon and is nearing profitability. And Salt Lending, which already employs 80 people, said it’s hiring more every month as its revenue ticks higher.

Most lenders in the crypto industry set up shop in 2017, initially offering enthusiasts a way to borrow cash without having to sell down their stockpiles of Bitcoin or other crypto assets they believed would soar even higher. But when prices crashed in 2018, lenders pivoted into new roles and continued to flourish. The lending niche, it seems, may fare even better in bad times than good.

“The bear market has certainly helped — at least has fueled the growth,” Michael Moro, chief executive officer of Genesis Capital, said in a phone interview. Bloomberg News

Genesis, which launched in March to let institutional investors borrow virtual coins by depositing U.S. dollars, has already issued $700 million of loans, Moro said. It now has about $140 million in loans outstanding with an average duration of six weeks, he said. Genesis plans to more than double its staff in the coming year to as many as 12 people, and it’s looking at growing in regions such as Asia.

“We’ve been profitable from day one,” Moro said. “We’ve certainly proven that there is market demand, that there’s product fit and that it’s time to invest even more in this side of the business.”

The company typically requires customers to deposit around $1.2 million in fiat to take out $1 million of crypto. It charges an annual rate of between 10 percent and 12 percent to borrow Bitcoin, for example.

Companies that accept cryptocurrencies as collateral for cash loans usually demand much larger buffers to ensure they don’t get burned by falling prices. New York-based BlockFi typically requires customers deposit $10,000 of digital coins to take out $5,000 in fiat, said CEO Zac Prince.

‘Low-Risk’ lending
When collateral drops in value, customers face margin calls, often starting with a warning that their holdings may be sold off soon. At BlockFi, margin calls are triggered if the price of the crypto collateral falls by 35 to 60 percent from the time the loan was granted. About 20 percent of the startups’ loans faced margin calls last year, Price said. Many more borrowers added collateral when warned, he said.

“We’ve never had a loss of principal,” Prince said. “It’s a low-risk type of lending, assuming you are able to manage that liquidity and track the volatility.” The company’s interest rates start at 7.9 percent.

Lenders aren’t entirely immune to the turmoil so common in the crypto world. The Securities and Exchange Commission has been scrutinizing Salt’s initial coin offering — a fundraising in which startups sell virtual coins to investors — and whether the sale amounted to an unregistered securities offering, the Wall Street Journal reported in November, citing unidentified people familiar with the matter. The company declined to comment.

‘Magic’ in bust
But most lending businesses — including Salt — say they are prospering and planning to expand their product offerings.

“From a consumer perspective, we will start to look like a diversified fintech company – that started with loans,” Prince said. “Similar to a company like SoFi, who started as just a student lender and expanded to mortgages, wealth management, and now deposit accounts.”

BlockFi is, in fact, planning to offer more credit products, including a Bitcoin interest-bearing savings account and a loyalty card earning crypto. ETHLend is working to provide its technology to other lenders in Switzerland and Australia, so they can also accept crypto collateral.

“Everything flies in the bull market, but true magic happens when it does well in a bear market,” Aave CEO Stani Kulechov said in a phone interview. “The crypto-backed lending model is one of the rarest.”

Author: American Banker
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Japanese corporation begins offering loans secured by Cryptocurrency

New Loan Program

An established Japanese corporation has begun offering loans secured by cryptocurrency.

The company says this is the first service in Japan where loans in Japanese yen can be obtained with cryptocurrency as collateral.

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Abic Corporation announced Friday the launch of its bitcoin loan service. “From June 1, we offer loans with virtual currency bitcoin (BTC) as collateral,” the company’s announcement reads.

Founded in 1973 and headquartered in Tokyo, Abic Corporation offers a broad range of secured loan products including commercial and real estate loans.

“In Europe and the United States, services that provide ICOs [Initial Coin Offerings] and loans are increasing, with virtual currency as collateral such as bitcoins,” the company wrote, elaborating:

“Bitcoin secured loan is a service where [customers] can receive loans using bitcoin as collateral as its name implies, but it is Japan’s first service to receive [crypto-secured] loans in Japanese yen.”

One major benefit of obtaining this type of loan is that, in Japan, “In the case of individuals, if you sell your own virtual currency, the [capital] gains on that sale will be miscellaneous income and will be subject to progressive taxation,” the company explained.

This tax can be as high as 55%.

Emphasizing that its crypto secured loans give customers access to funds without having to sell their crypto, the company urges customers to use its crypto secured loans “for a wide range of purposes such as new virtual currency purchases, [and] tax payments.”

Recently, reported on Japan’s National Tax Agency revealing that 331 taxpayers with 100 million yen (~US$914,000) or more in miscellaneous income, excluding pension income, declared cryptocurrencies in the year 2017.

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Loan Terms

The crypto secured loans by Abic Corporation are available for both businesses and individuals. The loan amounts are between 2 million (~US$18,260) and 1 billion yen (~$9.13 million) with annual interest rates ranging from 2.98% to 15.0%.

Customers can borrow for a period of between one month and five years. Loans can be repaid in up to 60 instalments with no prepayment fee. The delinquency charge is 20% annually.

The company detailed:

We will keep your [cryptocurrency] deposit and set the pledge…As a general rule, pledges are set in the virtual currency of the collateral, but it is possible to sell as soon as the market price rises.

Furthermore, the company assured that while holding bitcoins as collateral, customers will still receive any forked coins that may split off during that time. “Even if you receive loans with bitcoins as collateral, there is no worry that the right in division will be lost,” Abic reiterated. This week it was reported that a group of lawyers preparing a class action lawsuit against crypto exchanges in Japan that do not grant their customers their forked coins.

What do you think of crypto-secured loans?

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Author Kevin Helms
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