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Description
Today’s episode is from a January 2018 conversation with Dhruv Bansal, co-founder & CSO of Unchained Capital, a company that provides cash loans to holders of cryptoassets. We discuss why it’s better to borrow against Bitcoin than to sell it. For the full conversation, check out Flippening episode 8.
Links Relevant To This Episode
- Nomics.com
- Nomics on Twitter
- Clay Collins
- Flippening.com
- Nexo
- Nomics API
- Nomics’ Fully Customizable Daily Crypto Newsletter
- Dhruv Bansal
- Unchained Capital
- Bitcoin (BTC)
Transcript
Clay: Welcome to Daily Wisdom from the Flippening Podcast. These episodes feature short, to-the-point clips from our full-length interviews. We talk to the men and women behind the trades, crypto exchanges, and regulations with the goal of helping you become a better, more informed investor.
Michael: Hi, I’m Michael Kaplan, editor of the Flippening Podcast. Today’s episode is from a 2018 conversation with Dhruv Bansal, co-founder and CSO of Unchained Capital, a company that provides cash loans to holders of cryptoassets. We discuss why it’s better to borrow against Bitcoin than to sell it. For the full conversation, [00:00:30] check out Flippening episode eight.
Now, without further ado, our January 2018 conversation with Dhruv Bansal, co-founder and CSO of Unchained Capital. Enjoy.
Clay: Why would someone use Unchained Capital?
Dhruv: Maybe I’ll answer that in two parts: why borrow in the first place, and if you’re going to borrow why choose Unchained? I think you’re right. Probably, the biggest competitors that we have to our loan product are ignorance and apathy. Not knowing that this is a financial degree of freedom, not caring [00:01:00] perhaps for a variety of reasons, or honestly being overwhelmed. Why borrow? It’s demonstrably been the smart move, given the price history of Bitcoin.
Yes, there have been down periods. There have been windows in which someone who sold might have been slightly better off; but in general, given the rates that we charge, given the appreciation of Bitcoin, given the reality of capital gains taxes. Net-net, if you’re thinking of selling, it’s almost always better to borrow.
Clay: I know there can be potentially tax benefits [00:01:30] to taking out a loan on your Bitcoin versus selling that Bitcoin and using those funds to purchase something. You’ve got capital gains, maybe someone wants to defer. They want to translate what will be short-term capital gains into long-term capital games eventually, or something else. Can you describe what you’ve heard from your customer base in terms of their tax based motivations for using a loan product?
Dhruv: I would say when it comes to tax, this could be a seasonal aspect. Most of our loans have been in the last [00:02:00] month or two, as we have launched publicly and been growing. Certainly, tax behavior is important at the end of the year, but tax payments are not due until April or October. I, certainly, estimate greater interaction between the need to borrow—in particular the desire to either pay for tax consequences or avoid them—happening around those times. So far the most common use cases for our customers have been investment. Typically, wanting to buy a home, [00:02:30] or a real estate property, something that is more physical powered by their very digital Bitcoin, or wanting to take a position in a company, or honestly another asset class—whether that stocks and bonds, or traditional finance, or even additional crypto tokens. By and large, it’s making investments. Again, that speaks to the desire to get a return from having Bitcoin in the short term, while still being able to hold it for the long term.
Clay: There are no restrictions to what people can do with the money. Obviously, there are things that are legal and [00:03:00] illegal, but there is nothing in your documents that say you can’t take these funds and use it to purchase additional Bitcoin for example.
Dhruv: Let me be careful as I answer this question. Certainly, there are obviously things that it would be illegal for us to lend for. We do ask customers the stated purpose of their loan, we do have to run customers through KYC/AML procedures.
Clay: Clay again to define KYC/AML procedures. KYC stands for Know Your Customer. KYC is essentially the process of the business [00:03:30] identifying and verifying the identity of its clients. This is a legal requirement in many jurisdictions, and the term is also used to refer to bank and anti-money-laundering regulations. AML stands for Anti Money Laundering. AML is a set of procedures, laws, and regulations designed to stop the practice of generating income through illegal actions. Apologies if you already knew this. Back to Dhruv.
Dhruv: We do have a sense of what our customers’ income and net worth within and outside of crypto is. We are in a position to judge where did these [00:04:00] customers get the crypto from, what are they planning to do with it, is that safe? The chief decision criteria we use are obviously first and foremost, legality and appropriateness. Can we lend to this person?
Second, is it appropriate for us to do so? Is it safe in the sense that this person is going to be able to meet their interest payment requirements if the Bitcoin price collapses? Which is something we can talk about, how we deal with price volatility? Do they have other assets that they may be able to use to cover their obligations? We are unlikely to lend to someone who was borrowing against the full capacity of all their Bitcoin and has [00:04:30] no other sources of income.
That feels unsafe to us, but at the same time, we do obviously recognize crypto as a real asset class and that is important. In terms of what they’re doing with it, I don’t think there’s too many verboten things that they cannot do. I’m not involved in day-to-day loan operations, so someone else will have to speak to that. We do have folks who have borrowed to buy more crypto, but I think we probably take it on a case-by-case basis. From what we have learned about you, if you are someone with assets, if you are a sophisticated investor, if you’re choosing to leverage, that’s okay. If you’re [00:05:00] someone who doesn’t have a really great income, doesn’t have a lot of assets and is wanting to leverage your crypto, we may not accept that kind of risk.
Clay: I can give you an example from my personal life. I’m looking at potentially investing in a crypto hedge fund. Unfortunately, many crypto hedge funds don’t actually take BTC; so I will have to sell my BTC, get USD, generate a potentially taxable event, and then take that USD, and put it into the hedge fund. I would rather just [00:05:30] give you guys my BTC, take out some cash, give that to the hedge fund, not trigger a taxable event. Obviously, I’m going to have to pay for gains, and hopefully, gains that would come from a hedge fund that I invest in; but I just don’t want to generate that taxable event in the first place. Do you have customers that sound like that?
Dhruv: I don’t know that I have a customer that specifically has borrowed to invest in a crypto hedge fund, but it is certainly an example of borrowing against Bitcoin to make a leveraged investment against another cryptoasset. In this case, indirectly [00:06:00] through a fund. That is certainly a use case, but again, it’s more direct forms of investment, like buying homes and taking positions in actual companies, and similar that has tended to be the more common use case.
Clay: That’s it for today. If you like what you heard and want to support the show, please consider leaving us a review on iTunes, Stitcher, or wherever you listen to podcasts. If you decide to leave us a review after subscribing, we’ll send you a free Nomics T-shirt. Just hit us up on Twitter [00:06:30] @NomicsFinance after you’ve left a review and we’ll hook you up. You may also be interested in nomics.com, our crypto market cap and pricing website, check us out at nomics.com. Now, stick around for our legal disclaimer.
All opinions expressed by podcast hosts or guests are solely their own opinion and do not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.
The producers, hosts, [00:07:00] and guests of the show may maintain positions in the companies or assets discussed today.
