2018 was a huge year for crypto Initial Coin Offering (ICO) companies. $22 billion was raised from at least 967 different ICOs, according to Coinschedule. And of those, nearly 70% of those projects are worth less than their launch price, as reported in CCN. While many ICO companies launched with a significant amount of operating capital in their treasury, the down-trend in the crypto market has forced some of these companies to sell the crypto they raised to fund their business in the future.
However, many of the largest ICOs have largely resisted selling the ETH they raised from their funding raise. According to The Block, as of November 2018, the total amount of Ethereum locked up in ICO treasuries is a little over 3.57 million ETH (or roughly 3.5% of the total available supply). That’s down from the 4.65 million ETH (4.5% of total supply) locked up in ICO treasuries in April 2018. While this equates to a 23% decline, this sell-off is significantly less than the online hype would suggest. Other data-based reporting sources have also taken notice.
The top 15 ETH-holding ICOs are holding strong.
In the last 30 days, they have only sold 2.5% of their ETH holdings despite a 50% drop in the price of ETH.
The definition of HODL ? pic.twitter.com/Ac5M5IZBxX
— DRIVE Markets (@DriveMarkets) November 26, 2018
For many ICOs sitting on a significant amount of crypto, liquidating their treasury is an emergency scenario. To avoid this, many of these businesses are using crypto-backed loans to get access to USD or stablecoins in order to fund operations. There are a number of advantages to leveraging their cryptocurrency holdings instead of selling.
Get USD Funding Without Selling Your Crypto
The biggest benefit of taking out a crypto-backed business loan is that you get access to USD without having to sell your cryptoassets. That means you get to keep all of the upside potential of your cryptocurrency without losing ownership of it. At BlockFi, we securely store client assets with Gemini, the registered and insured institutional custodian. Learn more about how BlockFi stores client assets.
Our business clients use their funding for a number of different projects. One of the main use-cases is to fund a business expansion with crypto. One of the best ways to scale a business and capitalize on growing momentum is by offering additional products or services to your client base. This creates new revenue stream. Another key element to growing your business is to invest in marketing and outreach to get your brand in front of new clients.
Another major use-case is to fund employee payroll with crypto. A company’s success is directly correlated to the efficacy of its employees. The best thing a business owner can do to keep its employees happy is to pay them on time and in full each pay period. Happy employees lead to happy business results.
Crypto Backed Loans are Cheaper Than Other Business Debt Products
To fund operations, many businesses will take on high-cost debt. According to NerdWallet, these loans can range from 8.5% to 99% APR. This locks the business into payments over a set term using monthly payments. Additionally, this option often requires credit scores starting at about 600, which could exclude some businesses from obtaining any affordable debt funding.
Some businesses go to banks to obtain lines of credit, which operate similarly to credit cards. The main difference between the two is that with a line of credit, you only pay interest on the money you borrow. This option can be great for business owners looking for short-term funding, but will lock you into high-APR debt. This makes lines of credit a very expensive option for many companies.
Securing USD funding with your cryptoassets in a crypto-backed loan is an efficient way for companies that hold cryptocurrency, such as ICOs, to get access to low-cost funding that won’t ruin the credit history of the business or owners. Additionally, refinancing debt is a major use case for services like this.
For example, some businesses shoestring their operating costs by taking on credit card debt. Crypto-backed loans offer a way to pay off credit card debt using your crypto at significantly lower interest rates. American Express charges business clients 25% interest on some of their credit cards. BlockFi’s crypto-backed loan start at less than a third of that, making our services a significantly cheaper way to get access to funding for your business.
Tax Benefits from Crypto Backed Loans
In 2014, the IRS provided guidance to cryptocurrency investors that ”the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.’
This guideline means any time you trade, buy, or sell, cryptocurrency, you’re triggering a taxable event. This is because the IRS considers crypto (or ‘virtual currency’ as they called it) as property. By classifying crypto as an asset, this opens up trader to certain kinds of tax liabilities. The main tax event for most cryptocurrency traders will be from capital gains taxes, which can be expensive come tax season.
A key benefit to taking a crypto-backed loan is that the transfer of crypto as collateral does not trigger any taxable events. That means there are no negative tax implications associated with this process. The BlockFi team works with clients every day to help limit their tax liabilities and avoid having to liquidate their crypto holdings in order to pay off hefty tax bills. For example, we have clients who incurred significant capital gains exposure when the crypto market was near its all-time high. For many of these individuals, the tax burden associated with those taxable event trades were significantly higher than the current value of their remaining crypto and find themselves in a cash-strapped situation where they might be forced to sell their remaining holdings in order to pay their taxes. BlockFi helped them use their crypto to get USD to pay off their taxes without having to sell their crypto.
At BlockFi, we put a lot of work in to offering clients the best possible rates so that you can get the most use out of your crypto. Applying takes less than two minutes and clients can go from application to funding in as few as 90 minutes.
We’d love to hear back from you and see how we’re doing! Applying takes less than two minutes and clients can go from application to funding in as few as 90 minutes. If you have any questions about BlockFi or how our loans work, please contact us at firstname.lastname@example.org. We love hearing from you.