Babel Finance lets Bitcoin mining companies use their machines as collateral for loans so that the lender can offer them better terms.
The loan-to-value ratio (LTV) for these loans is 30%, partly because Babel holds the freshly mined crypto until the borrower pays back the loan. The LTV is significantly cheaper than the 160% normally charged by Babel, which means that borrowers would have to raise $ 1.6 million worth of Bitcoin to borrow $ 1 million in US dollars.
In a bull market, miners are increasingly restless and part with the mined cryptocurrency. These loans allow the miners to cover expenses like paying utility bills or buying new equipment while giving up less BTC or ETH.
“For miners, the greatest asset they have is their machine,” said Lei Tong, Babel’s chief financial officer. “After the price drop on March 12, they really wanted to keep as many coins as possible. Setting up their machines as a mortgage is a much better way for them to get credit than using Bitcoin. ”
The service launched in June 2020 and has since raised $ 22 million in machine-assisted loans.
In order to be able to offer this service, Babel has teamed up with the world’s largest ETH mining pool, the Spark Pool. one of the largest BTC mining pools, F2Pool; and bitcoin mining farm operators Hashage and Heng Jia Group.
Machine-backed loans now account for nearly 5% of the company’s total outstanding loans of $ 450 million.
Babel Finance’s main customers are miners, and the lender wants to help Chinese miners compete with Western institutions buying up the machines in a highly competitive market, Tong said. These new buyers have increased demand, but supply remains low due to the lack of computer chips that manufacturers use to make the machines.
Mining companies operate the machines while they serve as security for Babel and the lender keeps the mined cryptocurrency. This allows Babel to withdraw the full value of the loan even if the price of the machine is undervalued during a market crash, Tong said.
“It would normally be six terms for six months,” said Tong. “If you pay the terms, we will release the coins mined by the machines.” Babel knows the type of mining machine that is offered as a collateral so that he can estimate the number of coins the machines should produce.
Babel checks the machines daily by checking the output that should be coming from each machine to the mining operations and pools. Ten used machine dealers, who regularly work with mining machine buyers, also rate the machines based on the processing power of the mining network and the price of the cryptocurrency, Tong said.
Going forward, the lender wants to allow miners to use their machines to hedge against the risk of their cryptocurrency investments.
“It’s pretty complicated,” Tong said without going into further detail, but added that hedging would protect miners from losing their profits to market crashes.