Who Needs Loans When You’ve Got Digital Assets?
Apparently, an appreciable number of people do. The number of cryptocurrency lending platforms that have sprung up and survived proves this. Many crypto wealthy folks tend to grow too attached to their coins. Avowed hodlers would rather use their coins as collateral for loans when in need of fiat currencies. This way, a cryptocurrency holder gets to hold his/her coins and still get some fiat for immediate needs.
On one side, we have cryptocurrency holders that need cash but do not want to sell their coins for it. To have their wishes, someone must be willing to lend and hold the digital assets as collateral.
Making these cryptocurrency backed loans a possibility are the lenders. They come in various forms. There is everything from Bitconnect like lending platforms to fully registered and regulation compliant traditional institutions. There are also major players like SALT, Bitbond ,coinloan, Unchained Capital and Nebeus in the industry.
Their requirements and means of lending vary slightly. For instance, SALT, Unchained Capital, and Bitbond match borrowers with lenders from the pools of lenders they have. However, different lending platforms accept different digital assets as collateral. Also, not all lending platforms require assessment of borrower’s creditworthiness.
Problems With Cryptocurrency Lending
One major difficulty with lending against cryptocurrencies is that the price volatility could leave lenders at a loss. Major dips in price coupled with defaulting clients could leave lenders with coins worth far less than loans issued.
As a solution, lenders simply demand more of the digital assets as collateral. This, they hope would absorb any possible shocks from sharp falls in price.
The need for this service could vanish if cryptocurrency prices crash and stay low for extended periods. This is because potential borrowers would prefer selling their coins for cash.
Regulatory pressure has also forced some lending businesses to fold up. An example is the bitlending club which had to close down for this reason. Traditional institutions, however, fare better when it comes to meeting regulatory standards.
New York Family Office Dips Their Toes In
Dominion Capital recently entered the cryptocurrency lending business. They would be providing loans for persons or entities. Borrowers would secure these loans using bitcoin as collateral. The family office would however not be directly involved. A new division would handle the proposed business of facilitating loans against Bitcoin. There are also plans to add other cryptocurrencies as time goes on.
Dominion Capital’s strategy is to start small with a few loans. They would, however, increase the numbers if their services gain more interest. Currently, work is being done as they get ready to launch their product.
Funding for the project plans to come from the company’s own pockets as well as that of other investors they plan to bring on board. A large part of the expected amount is to come from outside the company.
Good For The cryptocurrency Space
Mainstream financial services keep finding ways of getting involved with cryptocurrencies. This could be a way of staying relevant should digital assets fully take over. It could also be a strategy aimed at achieving a competitive edge. Maybe these traditional financial sector businesses are simply taking advantage of a newly created asset class. Whatever the reasons may be, cryptocurrencies get more validation as bonafide financial assets as a result. It is surely a good sign when institutions outside the cryptocurrency space get comfortable with holding cryptocurrencies as collateral for loans.