No one said that being a successful long-term cryptocurrency trader was easy. Many long-term crypto holders are eager to spend part of their wealth, but at the same time want to fully maintain their investment. As expected, most of them are also very reluctant to help the centralized state incurring a large tax claim.
One solution that gets a lot of coverage is credit backed by crypto; where a cryptocurrency holder places part of its crypto-assets as collateral for a cash loan. For a loan of, say, $ 50,000, a lender could request $ 125,000 of cryptoactives as collateral. The problem is that if the price of the crypto given under guarantee falls and its value falls below $ 75,000 there will be a margin call that will force the borrower to increase the guarantee or reduce the loan.
An increasing number of Companies are active in this area, but collectively they have generated less than $ 100 million in loans. Deribit, the cryptocurrency futures and options trading platform, believes that the main reason for such a relatively small amount of loans is the possibility of a margin call. During a large price drop, borrowers always have to be ready to replenish their collateral while the lender faces the risk that a margin call will not occur and the loan is no longer covered by its collateral. We believe that these risks keep lenders and borrowers out of the market.
Derivatives, and specifically put options, can be a solution powerful for this problem. Put options are basically insurance contracts and can be used to guarantee the collateral, so that its value never falls below the value of the loan. This ensures that the borrower can always repay his loan and is always paid to the lender.
- The lender can secure a loan of $ 50,000 matures on December 28, 2018 and yields an annual interest rate of 14% using Deribit's put options.
- Of course, taking out insurance requires payment of an insurance premium. As of July 13, 2018 at 2:00 PM CET, the premium for the relevant put options maturing on December 28, 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 almost involves no risk.
- In percentages, this interest margin is 3 , 3% during the period or 7.2% per annum.
The sale options mainly benefit the borrower, since he does not face the risk of margin calls and effectively provides a refund guarantee of the loan in which, even if the value of the guarantee goes to 0, the borrower will never have to send additional cash to repay the loan. Since the lender is the one who pays for the put option, the interest rate on the loan is likely to increase a little, so the borrower pays around 15-17% per year but gets the benefit of the put option. At the same time, the lender gets 8-10% per year almost without any risk.
Deribit, one of the most liquid crypto option stockbrokers, offers options until December 28, 2018, so at this time is the maximum maturity date of a fully protected loan. At the moment, these options are only available in BTC, but more cryptoactives will soon be added.
Remove the risks of the margin call and the reimbursement will allow many more lenders and borrowers to enter the market. It could also speed up applications by eliminating the need for a personal credit check. This could eventually allow the cryptographically backed loan market to take off and allow some expenses for those poor crypto winners.
Deribit is live since June of 2016 after several years of development. John Jansen, the original founder was associated with Marius Jansen, Sebastian Smyczýnski and Andrew Yanovsky. Deribit started as a trading platform for Bitcoin futures and options in the summer of 2016.
Find out more about Deribit here – http://www.deribit.com/
Read the official Deritbit blog here – https://blog.deribit.com/
Set Deribit on Twitter – https://twitter.com/DeribitExchange
Chat with the Deribit team on Telegram – http://telegram.me/deribit
Name: Lennard Zwart
E-mail: [email protected]
Company: Deribit BV