In yet another sign of bitcoin’s emergence as a store of value, a bunch of startup lenders have begun using cryptocurrencies as collateral for personal loans. According to a Bloomberg report, startups such as Salt Lending and CoinLoan are offering loans in fiat currencies using cryptoassets as collateral. Nebeus, a startup based in London, claims to have already arranged 1,000 such loans using bitcoin and ether.
The impetus for using bitcoin and other cryptocurrencies as collateral is their phenomenal fortune this year. Bitcoin is up by more than 1,600 percent this year. The rising tide of its price increase has helped swell valuations for other cryptocurrencies and the overall cryptocurrency market as well. (See also: 6 Biggest Banks Offering Personal Loans.)
The loans at Salt Lending do not require a credit check or much paperwork. But they are expensive. For example, a $100,000 cash loan would require $200,000 of bitcoin holdings as collateral and an interest rate of 12 percent to 20 percent at Salt. Typically, unsecured loans for a similar amount from an institution like Wells Fargo have interest rates of between 7 percent to 20 percent. Given the steep swings in bitcoin’s prices, it is not clear how the startup will cope with a precipitous drop in bitcoin’s prices. (See also: 8 Possible Risks From Unsecured Loans.)
The Bloomberg report states that the loans may be useful to miners to defray electricity costs for operating energy-intensive ASIC machines for mining. The loans might also make their way to mainstream institutions, as Salt Lending is in talks to launch a similar product at a financial institution “within weeks,” according to Bloomberg.
CoinLoan has implemented a peer-to-peer model for bitcoin holders to use their cryptos as collateral for loans from people willing to lend cash. It aims to make money by generating fees from transactions on its platform. The loans serve another purpose for the startups. They provide utility to cryptocurrencies being used within the platform. CoinLoan plans to issue CLT tokens for its platform.
Similarly, Salt Lending uses SALT tokens as currency within its site. The tokens can be used to pay back interest value on loans. At 5:19 UTC, SALT had a market capitalization of $4.2 billion on Coinmarketcap.com and was trading at $8.41. But their price within Salt’s platform is $25. Commentators on Reddit forums are already in discussions for arbitraging the price difference to reduce interest balance on loans from the platform. (See also: Price Difference In Bitcoin Futures and Spot Markets Presents Arbitrage Opportunity.)