Maxim Akulshin, co-founder and CTO of eCoinomic.net, explained why banks should not be afraid to issue loans secured by cryptocurrencies.
Many believe that cryptocurrencies are highly volatile and this is the main reason why financial institutions overlook them. Banks do not seek to work with Bitcoin, Ether, and other cryptocurrencies in part, because they do not understand their value and cannot predict their behavior. Bitcoin is like a monkey with a grenade in the eyes of any classic financial institution. No one needs deposits, which are expensive like a prime rib today and will be cheaper than cabbage pie the day after tomorrow. At the same time, some Italian banks still accept cheese heads as collateral. Cheese ripens and gradually gains additional value, while the farmers make new products using the loaned money, which can be used as collateral all over again. It is like the eternal engine.
And what about us? Is Bitcoin really so much worse than parmesan? Let us imagine that we are a bank and issue short-term loans for up to 30 days. This is a common practice. We need to understand whether we can use Bitcoin as collateral for issuing such a loan. How often will we face a margin call, a situation where the value of the collateral becomes less than the cost of the loan?
First of all, let us make a reservation: in order to have a margin for volatility, we will give only half of the current value of the asset. If Bitcoin now costs $10,000, then we will transfer only $5,000 to the borrower.
Let us look at the schedule of the rate of Bitcoin from 2016 (source):
We calculate the maximum drop in the cost of Bitcoin for each point of the graph over a period of thirty days.
Based on the graph, we can see that there will be less than ten days when the bank could face the need to sell a pledge or change an arrangement with a borrower due to the high volatility of the market. And this is on a two-year interval.
In our experience, in percentage terms, this is no more than 1.5% of all loans issued for the year. A similar situation will be faced with ETH, XRP, and DASH.
The value obtained is a straightforward solution. Work with constant conditions for two days without an attempt at using an adaptive collateral management mechanism, when the maximum loan term and the value of LTV (Loan To Value) vary depending on current trends.
We are not talking about the current neural networks and expert systems. Using a simple trend line with the least squares method for ten days allows us to predict the current trend and avoid margin calls in principle, thus reducing the risks of the lender to a minimum.
I was a bit sly at the beginning of this article. I knew the answer to the question before I posed it, simply because I am involved in the implementation of a project that issues loans secured by cryptocurrencies. The actual work of the project confirms all of the above mathematical models. And this means that soon, in the process of realizing that the risks of this market are quite manageable, the serious players will eventually enter the market of cryptocurrencies.
In Russia, this will happen, obviously, in October or November of this year, after the adoption of the relevant law on the status of cryptocurrencies, which ideally falls under the proposed concept.
All of the above calculations can be done independently, and all the source data for this article can be found on GitHub.