A key factor holding back cryptocurrency from gaining a stronger foothold with investors is its lack of utility.
The more purposes you can create for them to be easily used by functioning markets, the more they should grow in popularity.
Enter Unchained Capital. Founded by Joe Kelly and Dhruv Bansal, the Austin, TX-based company offers loans to U.S. businesses and individuals who can post Bitcoin as collateral. People can borrow up to $1 million at 10-14 per cent APR without a credit check over a 3-24 month period. They must put up $2 in collateral for every $1 they borrow.
Mr. Bansal said he heard of Bitcoin back then and found it interesting, but didn’t dive in. It was only after pondering his next startup that he started closely studying the emerging cryptocurrency.
He has the chops. A PhD candidate in physics, Mr. Bansal studied the statistical physics of very large networks and their applications to a variety of real-world systems including the human brain, social networks, school systems, and glass formation.
While Mr. Bansal described himself as an accidental entrepreneur, Mr. Kelly is a learned hand. The founder of companies in such diverse industries as travel, residential construction and imports while he was still in school, he is a graduate of the Red McCombs School of Business at the University of Texas at Austin.
When they started studying the space Mr. Bansal and Mr. Kelly quickly noticed most Bitcoin holders never use their crypto. Looking at transaction histories, they saw 60 per cent of Bitcoin in existence hadn’t been spent in more than one year.
“At the time (2014-15) Bitcoin’s market cap was about $10 billion,” Mr. Kelly said. “That was $60 billion that wasn’t moving, Now the market cap is 30 times that.”
The pair began thinking of what they could build that would encourage people to actually use Bitcoin. A bit of a tough act, given so many were afraid of losing future gains by cashing in too early.
What if they could provide that value while allowing Bitcoin users to hold onto it? In 2016 Mr. Bansal and Mr. Kelly spoke with people with extensive crypto holdings and asked them about the attractiveness of different investment vehicles.
“Liquidity, derivatives, and fixed income were all attractive,” Mr. Bansal. “Those financial instruments exist for any other asset class.”
The process begins by requesting an account and identifying your state of residence (Unchained Capital’s services are currently available in 30 states). After filling out a KYC questionnaire, applicants use their existing wallet to send their collateral to the loan’s escrow address. Once the collateral is deposited the funds are wired. The loans are serviced with monthly interest-only payments, with the principal due at final payment.
Because the loans are heavily collateralized, Unchained Capital’s scoring methods don’t have to be as extensive as other borrowing options, Mr. Bansal said. They analyze the applicant’s general financial health and ensure they can afford the interest payments.
Unchained Capital takes several steps to guard against Bitcoin’s wild price fluctuations, Mr. Kelly said. If the collateral value drops by 25 per cent they will request additional collateral or principal payment. Should it drop by 45 per cent they reserve the right to repossess the collateral and sell it to recover the principal and interest.
While the pace at which Bitcoin reaches each new height is faster than some expected, its long-term health doesn’t rely solely on speculators, Mr. Kelly said. Citing its libertarian roots, he said a strong core belief in cryptocurrency for what it represents – a different societal approach to units of exchange.
“One has to hold those contradictions in one’s mind,” Mr. Bansal added. “Long-term, Bitcoin is probably one of the best investments to make in this generation. But it is also in a bubble, I don’t see why that can’t also be true.
“Can it fall from here to $2,000? Easily.”