Just as bitcoin has reached a new peak valuation and slipped back down, two experienced Austin founders are launching a lending service that helps cryptocurrency owners put those soaring values to use.
Unchained Capital offers cash loans of up to $1 million to borrowers who offer bitcoin and Ethereum as collateral. The loans have a 10-14 percent interest rate and terms of up to two years. The startup has been providing loans for about a year in a private beta test -- and Thursday they opened the loan service to people in about 30 states.
“Within the bitcoin ecosystem, most people don’t do anything with their bitcoin," Joe Kelly, co-founder of Unchained Capital told me. "They just hang on to it.”
Kelly co-founded the startup with Dhruv Bansal. The two were previously on the founding team of InfoChimps, a cloud data company, in 2009. It raised about $2.6 million and was acquired by the professional services company CSC in 2013.
Then, the two developed an interest in cryptocurrencies. The problem they discovered is that a lot of people have bitcoin as an investment and want to get value out of it without selling.
“We think that’s kind of a shame – and both a problem and an opportunity," Kelly said.
The $10,000 to $1 million loans, the co-founders told me, are typically used to buy real estate or make other traditional investments.
“Some will say, 'hey, this could collapse.' And they’re right, it could collapse.”
If the value of bitcoin drops by 25 percent, Unchained Capital makes a call to the borrower to discuss topping off the collateral to match the loan amount. If the value of bitcoin drops by 45 percent or more and the client doesn't add more bitcoin as collateral, Unchained Capital repossess the coins.
“Our customers are very incentivized to not wind up in default," Bansal said. That's because bitcoin holders tend to watch prices very carefully and don't want to sell coins unless absolutely necessary.
Financial institutions and their leaders have been all over the map on Bitcoin and other currencies.
On one hand, the CEO of JPMorgan Chase called bitcoin a "fraud" and other bankers have warned that it’s a bubble waiting to burst, leaving many cryptocurrency owners with little or nothing in the end. On the other hand, big banks are creating markets for bitcoin futures and China, Japan and Sweden are working on their own cryptocurrencies. The U.S. is also looking at developing one.
“Some will say, 'hey, this could collapse,'" Bansal told me. "And they’re right, it could collapse.”
Bitcoin prices won't go up forever -- something we're seeing in the current market which has driven the value of a single bitcoin from about $1,000 to, at least briefly, over $11,000 within the course of a year.
And that's why Bansal feels a lending service like Unchained Capital is key. As prices fall, bitcoin holders will look for ways to get value from their holdings. And giving them an option to get a loan lets coin holders keep their coins to potentially take advantage as the currency rises again.
“By creating this ecosystem… we’re increasing the utility of bitcoin as an asset class across the board," he said.
And Kelly and Bansal also see bitcoin-based lending as a way to provide value for bitcoin holders who may be cash poor but have a lot of value tied up in bitcoin, which generally won't help them get traditional bank loans to buy a house or start a business.
“Lending can be a very equalizing form of technology,” Bansal said. "Without liquidity, only existing wealthy people can hold this asset class for years."
