Is bitcoin worse than Parmesan?
Article of eCoinomic.net CTO Maxim Akulshin for DeCenter
Maxim Akulshin, Co-Founder and CTO of eCoinomic.net, explained why banks should not be afraid to issue loans secured by crypto currency.
It is believed that crypto currencies are highly volatile and this is the main reason why financial institutions bypass them. Banks do not seek to work with bitcoins, ether and other crypto-currencies in part because they do not understand their value and can not predict their behavior. For a classic financial institution, bitcoin is like a monkey with a grenade. Why do you need a deposit, which today stands like a spaceship, and the day after tomorrow will be cheaper than a pie with cabbage? At the same time, some Italian banks still accept cheese heads as collateral. Cheese ripens and gradually gaining additional value, and farmers on loan money are brewing a new product, which can be laid again. Perpetual motion machine.
And what about us? Is bitcoin really so much worse than parmesan? Let’s 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’s make a reservation: in order to have a margin for volatility, we will give out only half of the current value of the asset. If bitcoin now costs $ 10,000, then we will transfer $ 5000 to the borrower.
Let’s look at the schedule of the bitcoin course from 2016 (source):
For each point of the graph, we calculate the maximum drop in the cost of bitcoin over a period of thirty days.
Based on the graph it follows that the days when the bank could face the need to sell a pledge or change an arrangement with a borrower due to high volatility of the market will be less than ten. And this is on a two-year interval.
In our experience, in percentage terms this is not more than 1.5% of all loans issued for the year. A similar situation will be with ETH, XRP and DASH.
The value obtained is a solution “on the forehead”. Work with constant conditions for two days. Without an attempt to use an adaptive collateral management mechanism, when the maximum loan term and the value of LTV (Loan-To-Value) varies depending on current trends.
We are not talking about the current neural networks and expert systems. Using a simple trend line using the least-squares method for ten days allows you to predict the current trend and avoid margin-calls in principle, reducing the risks of the lender to a minimum.
I slipped a bit at the beginning of this article. I knew the answer to the question before I asked him, simply because I’m involved in the implementation of a project that issues loans secured by crypto currency. The actual work of the project confirms all the above mathematical models. And this means that soon, in the process of realizing that the risks of this market are quite manageable, big serious players will come to the market of crypto-currency.
In Russia, this will happen, obviously, in October-November of this year, after the adoption of the relevant law on the status of the crypto currency, which ideally falls under the proposed concept.
All the above calculations can be done independently, the source data for this article can be found on Github.
