Cryptocurrency as Loan Collateral?
It seems like a tough question to answer, and a scary one for those who still believe that brick and mortar banking is the only option in finance.
However, the times are changing, and many leading financial- technology institutions are in fact utilizing crypto as collateral. Will this become the new norm, and how are fin-tech companies securing this kind of collateral in a somewhat viable marketplace. In this article, we are going to dive into the possibilities and showcase why crypto will be the new collateral.
The crypto world is no longer a secret, and considering the market cap is estimated at roughly $400 billion it is a wonder that the financial industry is looking at crypto as the new collateral. This new influx of money has enticed those in the fin-tech world and is part of the reason that lenders such as Salt Lending, Nebeus, EthLend and CoinLoand were created. These are the first set of companies to take the plunge into the crypto collateral world, so what have they learned?
First and foremost, the crypto world is a bit of a volatile one at the moment, but that is not a bad thing. However, financial institutions are the first to want to mitigate risk, especially when that person is borrowing a large amount of money based on a piece of risky collateral. These new fin-tech companies have utilised one of two ways to lend to the crypto market.
The first is a higher than the normal interest rate, which in fact, puts crypto backed loans around the same rate as unsecured personal loans. Salt, for instance, would allow giving $100,000 USD to a borrower if they put up $200,000 USD worth of Bitcoins at an annual interest rate of 12%.
The second way is to do a hybrid loan that requires the borrower to put forward a second form of collateral. These loans can include terms that dictate that maintenance calls are held a certain amount of times per the term of the loan, which could require borrowers to post more of the cryptocurrency if the price drops.
The crypto market is a new and exciting one, and many leading financial institutions are starting to see why fin-tech companies got involved early. Currently, Bitcoin is the only cryptocurrency that companies like Salt are accepting, but like companies have already announced that Ether and Litecoin will soon be accepted as well.
For the mainstream banking institutions, this might be an adept or get left out scenario. Companies are already investigating getting into the crypto market, and utilising existing coins as collateral will only help them realize the potential of this internet currency. Plus, many of the leading fin-tech and financial companies are already looking at how blockchain techonolgy can better their banking practices and the speed at which money can transfer hands.
So what is next?
At the moment it is a wait and sees the game, but the simple fact is that today, you can utilise crypto as collateral, and it will be a matter of time until mainstream credit and banking institutions follow suit.
The market dictates the next big thing, and crypto would seem to it within the financial world.