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Cryptocurrency startup Deribit offer users fiat loans based on the cryptocurrency collateral. Deribit started as a Bitcoin Futures and Options trading platform that went live in the summer of 2016. Now, they’re bringing Crypto-backed USD loans to reality after years of development.
Deribit is the most advanced derivatives trading platform on for Bitcoin currently available. Surrounding long-term crypto holders, borrowing cash and using their crypto holdings as collateral in order to access liquidity is becoming increasingly popular. Deribit has been created to answer the questions and find a solution for those who are in search of a professional fully dedicated cryptocurrencies futures and options trading platform. The service can create a fully liquid marketplace with the same standards as a traditional derivatives market.
There are numerous long-term crypto holders that borrow cash using their crypto holdings as collateral in order to access liquidity. It isn’t easy being a long-term cryptocurrency trader. Many wish to remain fully invested and avoid potential capital gains tax claims, whilst being eager to spend part of their wealth in the market. As expected most of them are also very reluctant to help out the centralized state by incurring a large tax claim. However, Deribit is here to solve these issues and create a platform where USD can be borrowed through the cryptomarket.
Crypto backed lending is the solution; a crypto holder posts part of his or her crypto assets as collateral for a cash loan. For an example loan of $50,000, a lender could ask for $125,000 of crypto assets as collateral. The only issue is that if the crypto used for collateral starts dropping and its value dips below (for example) $75,000, there will be a margin call forcing the borrower to either increase the collateral or reduce the loan.
Despite there being a growing number of companies that are active in the industry, they have collectively originated less than $100 million of loans. Cryptocurrency futures and options trading platform Deribit believe the main reason for the relatively small total loan amount is the possibility for a margin call. During a large price drop, borrowers must always be ready to replenish their collateral, while the lender faces the risk that a margin call does not happen and the loan is no longer covered by its collateral. These risks are keeping lenders and borrowers out of the market.
Run from an office in Amsterdam, Netherlands, Deribit has been live since June 2016 after numerous years of development. The team consists of several Crypto-enthusiasts – John Jansen (the original founder), collaborated with Marius Jansen (ex Crypto-trader), Sebastian Smyczýnski (master of science in mathematics) and Andrew Yanovsky (Ph.D. theoretical physicist).
“There is simply no other platform available that can guarantee similar performance. We developed our own matching engine from scratch and all of our technology is proprietary. We believe in Bitcoin and in the future of cryptocurrencies in general. We expect millions of traders will be trading cryptocurrencies at any given moment in time soon, and our platform is built with the potential to eventually serve those millions of users at the same time with real-time low latency data.” – Derebit
Derivatives Are The Powerful Solution to the Problem
Derivatives could be the solution to all, and most significantly – put options. These are insurance contracts that can be used to ensure the value of the collateral never drops below the value of the loan, ensuring the borrower always repays its loan and the lender is always paid.
A $50,000 loan maturing on the 28th of December 2018 and yielding a 14% annual interest rate can be insured by the lender using Deribit put options. Of course, taking out insurance requires an insurance premium to be paid. As of the 13th of July 2018 at 14:00 CET the premium for the relevant put options maturing 28th of December 2018 was $1,499.
The total interest paid by the borrower to the lender amounted to $3,203, so after the cost of the put option the lender still has $1,672 of interest margin that carries almost no risk.
In percentages, this interest margin is 3.3% over the period or 7.2% on an annual basis.
Put options mainly benefit the borrowers as he or she is no longer faced with the margin call risk and effectively, it provides a loan repayment guarantee (when even the value of the collateral falls to zero) the borrower will never have to post extra cash to repay the loan. Since the lender is the one paying for the put option, the interest rate can increase. The borrower pays about 15-17% per year, but benefits from the put option. Alternatively, the lender gets 8-10% per year, with minimal risk.
To ensure several more lenders and borrowers enter the market, Deribit plan to remove the margin call and repayment risks. This could potentially speed up applications by removing the need for a personal credit check, allowing the crypto backed lending market to succeed and allow spending for those poor crypto winners.