As neo banks continue to dominate the industry, mainly because of the pandemic, digital banking interactions have become commonplace. This begs the question: do cryptocurrency and fundability go well together? Merrill Chandler breaks down how to maximize this digital currency as more and more banks embrace online interactions. He also explains how this impacts your relationship with lenders and how cryptocurrency could play a role when getting a loan.
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Cryptocurrency and Fundability: Friends or Foes?
I’m excited because many people have been talking that they’re trading Bitcoin and they’re into cryptocurrencies but they don’t know how it relates to fundability. In this episode, we do a deep dive into exactly what it means and how we can plan for the future using these alternatives. Maybe soon to become dominant means of financing our futures and the opportunity to trade in these cryptocurrencies. I’ll see you on the inside.
Welcome back, everybody. It is a fine day when the rules of fundability continue to be applied to newer and even more revolutionary banking opportunities. What do I mean by that? Cryptocurrency is all the rage. Not just Bitcoin but more newcomers are entering the market and some are making a killing. Some are losing their shirts. The question becomes and what’s come up for us before is how does fundability apply to cryptocurrencies? Here’s the beauty of fundability. Fundability, by definition, is the positive effect of borrower behaviors such that it creates trusted lenders to give you money. That’s what fundability is. The ability to get funding but it’s based exclusively on your borrower’ behaviors. The way you treat whatever money you’ve received.
Why cryptocurrency? First of all, we’ve been doing the last few segments of the show have been all about how the definition of banking, the who’s banking. We’ve been talking about neobanks, the new banking model. Where, like we’ve talked about everywhere else, we’ve said that banks want to go more online. While some of the big banks will never get rid of branches, more of the smaller tier banks, even Wells Fargo, during the pandemic, shut down a whole slew of branches. Everybody’s moving online. They want to make checking accounts online. They want to do more, not just phone calls but actual video conferencing. When somebody is setting up a new account, that’s how they’re building these relationships.
Bank of America, which is one of the more conservative of banks, is doing an experiment now where they are allowing you to trade cryptocurrency with your accounts. Whether it’s one of their money market accounts or where you can backstop a margin account. They’re allowing never before but now they’re doing tests on being able to trade cryptocurrencies. If Bank of America, one of the more conservative of the tier one banks, if they’re saying, “We’ll allow the trading of crypto shares with funds that are resident in one of our accounts,” then that’s a bellwether move into what the attitude is towards how acceptable cryptocurrencies are. You’ve been able to trade gold futures and harvest futures, wheat and everything. You can backstop a margin account from Bank of America for everything. Now, moving into cryptocurrencies is allowing one more level of legitimization of this phenomenon. I can’t call it new but it’s barely a decade old.Fundability metrics will continue to apply in any loan. It does not matter if it is securitized by Bitcoin or harvest futures. Click To Tweet
How does fundability play within this? Fundability is simply the quality of your borrower’s behaviors such that you inspire a lender to give you money. If you’re already building a relationship with a lender, those are what they call internal performance data. That’s their language. I call them borrower behaviors. Those borrow behaviors are being measured fastidiously to see whether or not they want to raise limits, give additional loans or back a margin account for cryptocurrency. The good news with this digital move, more banks are moving to digital interaction with their customers. Cryptocurrency is another thing to back alone with. For example, let’s say, probably the next move once you can buy cryptocurrencies on Bank of America margin accounts. The next move is likely for any bank to do is will you back a loan with cryptocurrency.
The number one indicator of a commodity whether it’s wheat, gold or cryptocurrency is are there enough confidence in that market for someone to use it to backstop alone, to use it as collateral or security for a loan? If you can put, I have seventeen tons of wheat futures and I want to borrow $100,000, will you collateralize my loan with these wheat futures? The answer is yes. Commodities have been borrowing against commodities for decades, if not centuries. What’s up next? Cryptocurrencies.
So far, there’s not a public brouhaha of being able to back loans with cryptocurrency but that’s the direction we’re headed. This move from Bank of America gives us that sense that they’re saying, “If it’s legitimate enough of a commodity to trade dollars for crypto then the next logical step will be to have crypto be the commodity that backstops any other loan.” The bottom-line question for us regarding crypto is when that day comes and it’s coming. Remember, the first one to be legitimized is going to be Bitcoin because of its track record. It’s got a long period of being a commodity that has been traded. Besides any cooling off, there have been periods of cooling off before but it’s way more valuable now than it was years ago.
Remember, a lender who is going to lend money or extend credit to you wants to make sure that that security that’s backstopping that loan is not going to devaluate too much over the course of your loan term. If they’re going to lend $100,00 to you and you’ve got 300,000 in Bitcoin. They don’t want the value of Bitcoin to go to $50,000 so that you’re only partially securitized or collateralized. The only time a commodity is used to backstop a loan or to be the security of a loan is when it has some significant version of either uphill movement or that it’s stable. They’re going to 2X, 3X the amount of the loan in case of loss.
All my musings about backstopping loans, the bottom line for us is that fundability metrics will continue to apply. It does not matter if the loan is securitized by Bitcoin or wheat or gold or anything else. The question is the lender is going to measure what your borrower behaviors are as you pay it back. They’re going to see, do you get ahead of the payment slope as we talk about it in the bootcamp. What utilization are you going to have if it’s a credit line that’s being backstopped? How do you use the lent money? That is fundability. Those principles are not going to change because the confidence they have in the loan being given is not based on the security of it. It’s based on your power to repay and the process of your repayment.
The bottom line for us, crypto is good news because if you’ve got crypto as part of your asset base that you want to be able to do high-level loans from or margin accounts that are backed by crypto, then the principles of fundability are still going to apply everything that’s in The New F* Word. It doesn’t matter. My bestselling book is still going to apply. Everything that we teach is still going to apply. To conclude here, the next stage after, it’s true enough of a commodity to buy and sell using cash in Bank of America account. The next one is can I borrow cryptocurrency. That is going to be the telltale sign is can I take a loan out in crypto. The fundability principles will still apply. Thank you for joining me on the show where we take on how do the fundability principles apply everywhere we go. Have an amazing day.