Guide to Bitcoin Backed Loans in Australia
Liquidating cryptocurrency assets can be a complex process. Depending on your individual circumstances, selling crypto assets as a profit could potentially incur a capital gains tax. Cryptocurrency and Bitcoin backed loans, however, can function as a highly effective way to cash out or leverage your cryptocurrency without actually selling your cryptocurrency holdings.
The Bitcoin backed loans industry is relatively new, but provides crypto holders with the ability to access fiat currency loans backed by their cryptocurrency capital in a manner almost identical to traditional securities-based lending. If an individual owns IBM stock, for example, it’s possible to lend IBM stock for a fiat currency loan. Once the loan and interest is repaid, the borrower still possesses economic ownership of the stock used as collateral.
Bitcoin backed loans function in a similar manner, but incorporate a number of additional functions that help to hedge against the volatile cryptocurrency market. Bitcoin backed loans are unique in that they don’t require credit checks or income verification, nor are they typically subject to early repayment fees.
What is a Bitcoin Backed Fiat Loan?
A Bitcoin backed fiat loan is functionally similar to a traditional securities-backed loan, but is free from many of the obstacles and complex procedures necessary to access capital via traditional securities lending. The primary purpose of a Bitcoin backed fiat loan is to provide cryptocurrency holders with the ability to access fiat currency instantly, using their cryptocurrency holdings as collateral.
The biggest benefit of Bitcoin backed loans is that, at the end of the loan period, the borrower still owns the Bitcoin used as collateral — allowing crypto holders to both “HODL” and reap tangible real-world financial benefits at the same time.
How Does a Bitcoin Backed Loan Work?
Accessing instant fiat currency via a Bitcoin backed loan is relatively simple. Borrowers, after selecting a Bitcoin backed loan platform, must provide an amount of Bitcoin as collateral, and are able to borrow up to 50 percent to 60 percent of the value of the collateral in fiat currency. In most cases, once collateral is provided, borrowers are provided with fiat currency immediately — within the Australian banking system, this can be as little as five minutes. Some platforms offer on-the-spot cash alongside immediate transfer.
The flexible nature of Bitcoin backed loans allow borrowers to simply pay a monthly fee for as long as the loan is required, with no set term — loans can be paid back as soon as borrowers would like to regain control over their Bitcoin collateral.
The manner in which Bitcoin is stored in a Bitcoin backed loan is highly important. In order to eliminate the risk of exchange hacks, Bitcoin backed loan platforms hold Bitcoin collateral in cold wallets which are kept offline. It’s important to note that as Bitcoin backed loans involve fiat currency, they typically required that borrowers provide Know Your Customer and Anti Money Laundering identity information.
The volatile nature of cryptocurrencies — Bitcoin included — requires that Bitcoin backed lending platforms incorporate a margin call function in the loan contract. Loans are commonly provided with collateral calculated on the price of Bitcoin at the time of the loan. Should the value of Bitcoin drop below this price, a lending platform may need to liquidate the position.
In this case, lending platforms typically provide borrowers with margin call notifications, allowing them to top up collateral, which can often be provided in either fiat currency or in Bitcoin. In some cases, lending platforms may provide a partial collateral return should the value of Bitcoin increase significantly and remain higher than the original collateralization pricing for over 30 days. Other platforms provide borrowers to access additional fiat funds based on the new value the collateral.
Should a borrower miss a margin call, lending platforms typically liquidate the Bitcoin collateral on a reputable cryptocurrency exchange, record the transaction, and provide the borrower with the balance less the principal owing and any accrued interest.
What Should You Consider Before Getting a Bitcoin Backed Loan?
There are a number of factors to consider before taking a Bitcoin backed loan. It’s important to perform your due diligence and make an informed decision on the expected behaviour of the cryptocurrency market and its influence on Bitcoin prices before taking a Bitcoin backed loan — if the market is exhibiting strong bearish signs, it’s probable that your loan will require additional collateral should the price of Bitcoin drop.
It’s also essential to assess the background of the platform you’re considering taking a Bitcoin backed loan from — a reputable lending platform should provide comprehensive details regarding the manner in which Bitcoin collateral is stored, how margin calls and collateral management operates, and possess a strong track record in the financial industry.
What Are The Risks of Using Bitcoin as Collateral?
While Bitcoin backed loans offer a wide range of benefits, there are a number of risks that must be taken into account as part of comprehensive due diligence. The first and most important risk to consider is the security of your crypto assets while they are being used as collateral. It’s essential to ensure that the platform you have selected for your Bitcoin backed loans uses advanced and highly secure cryptocurrency storage and custodial practices.
Should a drop in the market price of Bitcoin cause a margin call, a borrower must have either cryptocurrency or fiat currency available to top up the collateral balance. If a borrower fails to top up collateral, it’s highly likely that the option to wait for the market to recover will be taken away as the collateral is liquidated.
What Are The Advantages of Using Bitcoin as Collateral?
The advantages of Bitcoin backed loans are varied — individuals holding large amounts of cryptocurrency may seek to take out a Bitcoin backed loan in order to “cash out” of the market without triggering a taxable event. This function can be particularly attractive to initial coin offerings seeking to free up capital without compromising their cryptocurrency position.
It’s also possible to use Bitcoin backed loans to leverage cryptocurrency holdings — a borrower, having purchased Bitcoin at a high price, may wish to borrow against the cryptocurrency they currently own and then buy additional Bitcoin at a lower price should they believe the price of Bitcoin will drop.
International Bitcoin Backed Loan Platforms
While the Bitcoin backed loan industry is new to the Australian financial ecosystem, several international crypto platforms are already offering Bitcoin backed loans. SALT lending is one of the biggest cryptocurrency backed lending platforms online, offering a diverse range of personal and business lending options. While SALT has recently made crypto backed loans available in New Zealand, lending options are currently unavailable in Australia.
Nexo, another crypto backed lending platform, and offers a diverse range of flexible crypto-backed loans via a streamlined interface. The Nexo platform, however, currently only operates within the European Union, with plans to expand into the United States in the near future.
Coinloan takes an interesting peer-to-peer approach to crypto-backed loans. The Coinloan model allows individuals to provide cryptocurrency as collateral, with loans provided by other individuals that deliver fiat currency. The entire Coinloan platform is mediated by smart contracts, making it a truly decentralized option. Loans issued via Coinloan are only available in EUR within the European Union at this point in time.
Where Can You Get Bitcoin Backed Loans in Australia?
There are a number of platforms that offer Bitcoin backed loans within Australia, such as Blockbid, an Australian cryptocurrency exchange that has recently partnered with an as-yet unnamed Australian credit provider in order to deliver Bitcoin and cryptocurrency backed loans.
There is, however, one platform that offers Bitcoin backed loans in Australia, complete with walk-in offices in Sydney, Melbourne, and Adelaide.
The Bitcoin Dealers
Bitcoin Dealers is an Australian cryptocurrency brokerage that maintains offices in Melbourne, Sydney, and Australia, offering over-the-counter cryptocurrency purchases and sales. In addition to offering Bitcoin services, Bitcoin dealers also facilitates the direct purchase or sale of Ethereum, Ripple, Litecoin, and Bitcoin Cash.
While purchasing cryptocurrency can be relatively simple, the sale of cryptocurrencies via exchange platforms involves the risk of having your bank account frozen by any of the Big Four banks — several large banks have recently frozen cryptocurrency trader accounts, labeling fiat currency transfers from international exchanges as a “security risk.”
Bitcoin Dealers offer office premises that provide cryptocurrency investors with a secure environment in which larger cryptocurrency transactions can be conducted without the risk associated with meeting unknown local traders in coffee shops or cafes, or the risk of international fiat payments from offshore exchanges, at competitive market rates.
Bitcoin Dealers Bitcoin Backed loans follow the international crypto-backed loans model, and provide anybody with the ability to access fiat capital within five minutes regardless of credit status. Importantly, Bitcoin Dealers loans have no locked in contracts, and can be accessed without the need for an appointment.
Getting started with Bitcoin Dealers is simple. Borrowers are able to borrow up to 60 percent of the value of the Bitcoin they provide as collateral, which is held in a secure offline cold wallet. After providing collateral, borrowers receive either an on-the-spot cash payment, or an immediate, verifiable transfer.
Bitcoin Dealers Bitcoin backed loans can be held as long as the borrower requires, with a simple once-monthly fee that ranges from 3 percent to as low as 1.5 percent, depending on the loan amount. Finalizing a loan is as simple as paying back the total balance, at which point borrowers are provided with their Bitcoin collateral.
Bitcoin Backed Loans in Australia
As Bitcoin values can move swiftly in the current crypto market, an Australia-based lending platform is the best bet to ensure you don’t get caught out in a sudden price drop — Australian lenders are far more likely to get in contact during a sudden margin call.
The developing nature of the Bitcoin and cryptocurrency backed loan ecosystem means that there are only a handful of platforms internationally that provide crypto loan services. If you’re searching for a Bitcoin backed loan in Australia, it’s best to select a lending platform that provides face-to-face, personal service that allows you to ensure your crypto collateral is held in a safe manner.