24 September 2018

This Company Helps Bitcoin Millionaires Unleash Their Fortunes

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Dave Carlson recently wanted to borrow about $1 million to fund operating expenses at Giga Watt, his cryptocurrency-mining operation based in East Wenatchee, Wash. The mining, which generates new units of cryptocurrency using specialized computers, requires vast amounts of electricity; Carlson said he spends about $250,000 a month on power. He could have exchanged some of his crypto for cash, but he didn’t want to miss out on future surges in value.

For Carlson and other cryptocurrency investors, this is the conundrum: They may be millionaires, but very few businesses accept bitcoin, Ethereum or other digital currencies. People who own crypto typically exchange it for U.S. dollars to make purchases, missing out on potential value increases, paying hefty fees or incurring capital-gains taxes.

For a small number, a fledgling lending platform has provided a solution. The Denver-based startup Salt matches borrowers with lenders that provide high-interest loans backed by digital currencies. Clients transfer their digital holdings to an account overseen by Salt, which keeps the funds as collateral in exchange for U.S. dollars, typically up to 40% of the crypto’s current value. When the loan is repaid, Salt transfers the digital currency back to the borrower. While Salt is only about a year old, digital-currency insiders say such platforms could ultimately unleash the billions of dollars of value trapped in cryptocurrency into conventional markets.

Salt is “completely changing how crypto holders can deploy their wealth,” said Trevor Koverko, chief executive of Polymath, a firm that brings securities to the blockchain. “Spending your cryptocurrency at the grocery store or to pay your rent is pretty hard to do.” (Koverko is not affiliated with Salt.)

Salt was founded by four early adopters of cryptocurrency. CEO Shawn Owen was the chief operating officer for Southern Concepts Restaurant Group, a chain that took bitcoin. Attorney Benjamin Yablon accepted bitcoin at his law practice, which centered on emerging financial-technology platforms and regulatory compliance; he now heads up global strategy for Salt. The other founders, Blake Cohen and Caleb Slade, worked in real estate and mobile-application development, respectively.

Owen came up with the idea for Salt in 2012 when a bank declined to recognize his bitcoin holdings as an asset. “This was a lightbulb for me,” he said. “I wanted to develop a way to leverage this asset.”

Salt said its network of lenders had loaned $40 million but has received applications for about $1.5 billion worth of loans. The company is approved to do business in 15 states including South Carolina, Georgia and Alabama. For businesses, the average loan size is $5 million. For individuals, it’s about $250,000.

Salt said its lenders are high-net-worth individuals and investment groups, and have little say about whom the company lends to. But they do set the loan’s terms, including interest rates, which vary widely. When investors sign up, they lay out the terms under which they want to lend, including the interest rate they expect; Salt matches them with deals that meet their criteria.  

Carlson, a technology investor and former Microsoft software engineer who has been involved with cryptocurrency since 2012, said he has struggled to find ways to leverage his bitcoin to buy bricks-and-mortar assets. He borrowed $1 million through the platform last year (he declined to disclose the interest rate). He and his wife took out an additional $600,000 loan from Salt to buy two vacation-rental homes in Quincy, Wash., which the couple paid for in cash.

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Mark Warden of Porcupine Real Estate, a real estate brokerage in Manchester, N.H., has worked with home buyers and sellers who own bitcoin, and said there is a demand for the service. “There are people out there sitting on pretty big holdings that will take a hit when they cash out,” he said. “They want to be able to borrow against their crypto.”

Salt’s borrowers create a profile, with annual membership fees starting at $2,750 and going up to 100 times that, depending on the size of the loan and value of the collateral. They make monthly payments in U.S. dollars. The platform also charges a 2% servicing fee. Salt performs standard anti-money-laundering checks but does not check credit, Owen said.

Owen said the company has also instituted a margin-call type procedure, whereby borrowers must add additional digital currency as collateral when the coins fall below a certain value. They can also pay down some of the principal in U.S dollars to lower the loan-to-value ratio, or allow Salt to sell a portion of the collateral. If they don’t, some of their collateral will automatically be sold.

Critics say the model is risky for lenders, given the continued volatility of bitcoin and other cryptocurrencies. Bitcoin’s value dropped from a high point of almost $20,000 in December to about $6,000 by March. It was valued at approximately $6,155 on Tuesday.

Established lenders find the prospect of lending against digital currency too risky, said Ace Watanasuparp, a regional vice president for Citizens Bank. “You could lock one of these loans in at a certain value today, and tomorrow it could plummet,” he said. “It’s too scary for financial institutions.”

Steve Weiner, an investor in Salt’s debt fund, said he hasn’t been put off by the recent plunge in bitcoin’s value. “If you expect to earn such high returns, you’ve got to accept the risk and the volatility,” said Weiner, who heard about Salt through his business partner, whose son is one of the founders.

Weiner, president of Signet Partners, a financial consultancy, said he put up an initial $75,000 more than a year ago, relying on Salt to vet the borrowers. He said he has been receiving interest, and if all goes smoothly, he is slated to earn a 15% to 20% return. He has never owned cryptocurrency but said he was intrigued by blockchain technology and its potential to transform financial records.

Carlson said he’s grateful to have a way to diversify his portfolio, especially with the recent volatility in bitcoin. “We’re already living a risky life being in crypto,” he said.

Click here for the original article from The Wall Street Journal.  

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