By Josiah Wilmoth
You can now stake your bitcoin holdings as collateral when applying for a USD-denominated personal or commercial loan.
You Can Now Stake Bitcoin as Loan Collateral
The cryptocurrency markets have experienced unprecedented growth in 2017, and many bitcoin investors have accumulated significant wealth. However, many of these investors believe that the bitcoin price continues to have significant long-term potential, so they are reluctant to sell their holdings for cash when they need liquidity.
Financial services firm Unchained Capital aims to fill this void.
Earlier this week, the lending startup began offering bitcoin-secured loans to the U.S. public. Through Unchained Capital, borrowers can obtain personal or commercial loans worth up to $1 million at a 50 percent loan-to-value ratio, meaning that they can borrow $1 for every $2 worth of bitcoin they deposit as collateral. Loan terms range from three to 24 months, and interest rates vary from 10 to 14 percent APR.
“We believe that crypto investors should have the opportunity to avail themselves of proven financial instruments. To start, we’re focused on offering loans secured by Bitcoin, and we’ll soon be offering loans secured by Ethereum as well,” said Joseph Kelly, CEO and co-founder of Unchained Capital. “These assets may still be novel, but that doesn’t mean that achieving any kind of leverage needs to be complex. We don’t want individuals who created wealth for themselves to lose it because they had no financial freedom.”
However, borrowers will have to keep an eye on the value of their collateralized assets. If the value drops by 25 percent — as it has been known to do during a day of intense market volatility — the lender will request additional collateral or a principal payment. If the value drops by 45 percent and the borrower does not send more assets, the lender may repossess the collateral. This could put borrowers who stake a large percentage of their bitcoin holdings in a precarious situation if the bitcoin price takes a precipitous drop.
Nevertheless, Unchained has already completed a successful beta, and the company says that clients have used the loans to pay off outstanding debts with more expensive interest rates.
“We’ve gotten great feedback from our early clients, many of whom have used their loans to pay down more expensive debt or for a real estate transaction,” said Dhruv Bansal, Chief Science Officer and co-founder of Unchained Capital. “We focus on transparency and security because we believe that’s the best way to build a business while helping this exciting market grow.”
‘The Basis of a Parallel Financial System’
Commenting on the opportunity for this business model, Nic Carter, a cryptoasset research analyst at Fidelity wrote on Twitter that he believes this type of financial product will “take bitcoin from a curiosity to the basis of a parallel financial system.”
Indeed, while it is unlikely that decentralized cryptocurrencies will supplant fiat currency — at least anytime soon — it is easy to foresee such a parallel financial ecosystem developing within the digital economy. Companies such as Unchained Capital could serve as important intermediaries under this model, enabling consumers to move between the legacy and digital financial ecosystems with reduced friction and increased convenience.
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Featured Image from Getty Images
By Josiah Wilmoth