So, here’s what I said in a post for DealBreaker earlier this week about the distinct possibility that digital wealth generated by trading in Bitcoin and other cryptocurrencies is going to end up worming its way into the decision calculus for lenders:
Which brings me neatly to another question: how long is it going to be before people are effectively using Bitcoin as collateral? That is, if your net worth has just increased exponentially thanks to gains in cryptocurrencies, how long is it going to be before that gain starts getting factored in when it comes to securing lines of credit?
I mean obviously you’re not going to put an asterisk by your income that draws people’s attention to a handwritten footnote that says “this is subject to change depending on the price of make-believe space tokens that are so volatile I can’t even give you a rough estimate of where they might be trading without checking my phone”, so how are lenders going to know if this starts becoming an input in their models?
Well guess what? This, via Bloomberg:
Until recently, people who paid virtually nothing for the virtual currency and watched it soar had only one way to enjoy their new wealth — sell. And many weren’t ready.
Lenders on the fringe of the financial industry are now pitching a solution: loans using a digital hoard as collateral.
While banks hang back, startups with names like Salt Lending, Nebeus, CoinLoan and EthLend are diving into the breach. Some lend — or plan to lend — directly, while others help borrowers get financing from third parties.
I’m going to dive into this further later on, but I couldn’t resist throwing something about it up this afternoon.
Let me just say without equivocation that anyone who decides to lend against cryptocurrency holdings is going to go bust – plain and simple.
You cannot lend against an “asset” that is as volatile as these things are. There is no way to ensure that you’ve overcollateralized this enough.
Bloomberg notes that according to the above-mentioned “Salt”, a Bitcoin investor looking to tap $100,000 in cash would “probably need to put up $200,000 of bitcoin as collateral, and pay 12 percent to 20 percent in interest a year.” But that hardly covers it. Bitcoin has intraday swings of 20% or more all the time. That cushion could be wiped out in a matter of 48 hours.
Apparently some of these deals have margin calls built in, but the punchline on that is that the margin takes the form of more fucking Bitcoin. Prices on which could of course continue to fall, necessitating still more Bitcoin margin posting, and on and on.
Also, that necessarily means that these lenders are going to end up taking on more cryptocurrency risk as the price drops, opening the door for them to be left holding ever more worthless “assets” against cash loans they made.
If this actually takes off and this bubble persists long enough for any of these lenders to go public, short them immediately. They will go to zero. Period.