In this episode, Stephan Livera and Dhruv Patel, CEO of Arch Lending, discuss the current state of Bitcoin lending, market trends, and the unique products offered by Arch Lending. They explore the mechanics of Bitcoin-backed loans, risk management strategies for borrowers, and the importance of custody and security in the lending process. The conversation also touches on the future of Bitcoin lending, growth strategies, and the evolving landscape of financial products in the cryptocurrency space.
Takeaways:
🔸Bitcoin lending is gaining traction despite market volatility.
🔸Arch Lending offers flexible Bitcoin-backed loans with up to 60% LTV.
🔸Understanding the mechanics of Bitcoin loans is crucial for borrowers.
🔸Customized loan products cater to specific needs of clients.
🔸Risk management is essential when borrowing against Bitcoin.
🔸Arch Lending does not rehypothecate client collateral, ensuring security.
🔸The market for Bitcoin-backed loans is expected to grow significantly.
🔸Debt can be a powerful tool for wealth building if managed wisely.
🔸Interest rates for Bitcoin loans have decreased over time.
🔸Current market conditions may present safer borrowing opportunities.
Timestamps:
(00:00) – Intro
(01:22) – How does Arch Lending work?
(02:50) – What does Arch Lending offer?
(05:15) – LTV conditions & specialised loan products
(09:20) – Risk-managed borrowing against Bitcoin
(14:20) – How does Arch Lending custody the Bitcoin?
(15:46) – Comparing various Bitcoin lending models
(19:46) – Thoughts on borrowing against Bitcoin ETFs
(21:37) – Capital providers for Arch Lending
(23:16) – Will Arch Lending provide Proof of Reserves?
(24:34) – All-in-one Bitcoin financial services
(25:48) – Growth & future of Bitcoin lending
(28:08) – Who should NOT use Bitcoin lending services?
(32:45) – Will TradFi offer similar Bitcoin lending products?
(34:08) – Closing thoughts
Links:
Stephan Livera links:
- Follow me on X: @stephanlivera
- Subscribe to the podcast
- Subscribe to Substack
Transcript
Stephan Livera (00:01)
Hi everyone and welcome back to Stephan Livera podcast. Joining me on the show today is the CEO of Arch Lending, Dhruv Patel. Dhruv, welcome to the show.
Dhruv Patel (00:09)
Thanks for having me, Stephan.
Stephan Livera (00:11)
So there’s a lot of interest recently in Bitcoin lending and of course there’s been a big drop in the price recently so we’ve got to get your reaction on that also. So as we record this, the price is $66,000-ish per Bitcoin ⁓ and you know there’s a lot of people who are sort of like, is this a mid-cycle drop? Are we in a bear market, fully fledged? Kind of where are we at? yeah, maybe give us a bit of your thoughts on that to start.
Dhruv Patel (00:36)
Yeah, you know, it seems like we can’t catch a break with price action. ⁓ Ever since maybe last August, September, it’s mostly just been choppy and trending downwards. ⁓ I don’t have a crystal ball here, so I’m not going to opine on where we are in the cycle or maybe when it starts to turn around. But I will say, at least from recent, like the last few days and what I’ve been reading online with certain firms putting out research reports, it seems like we may have support for like a bottom-ish.
⁓ of where we are and so hopefully it’s only up from here.
Stephan Livera (01:11)
Yeah, let’s see. Hey, so speaking of lending, let’s talk a bit about the platform. So how has it impacted you in terms of, you know, customers and like liquidations or maybe many customers having to load more collateral in this kind of thing?
Dhruv Patel (01:26)
Yeah, absolutely. So maybe I can just step back and, ⁓ you know, I know many of your listeners probably already know what a Bitcoin back loan is, but I can spell out some of the mechanics and how it works. So typically you borrow ⁓ a certain LTV against your Bitcoin. And so we offer up to 60%. And what happens is there’s two things, like as the price of Bitcoin rises, you can either get some of your collateral back or increase your loan size. And as the price of Bitcoin drops, you either ⁓
need to top up more collateral in a margin call or you have the risk of liquidation. And so when we see price drops like what we’ve seen over the last two weeks and more ⁓ sort of over a longer period of time over the last six months, both of those outcomes have occurred where we have margin calls happening and so clients need to go and add additional Bitcoin to keep their loans safe. But also when you see drops from like the peak of 120 something K,
to the low of $59,000, you eventually see some clients not have additional Bitcoin to top up and as a result, there do need to be some liquidations just to keep the loan book in healthy state.
Stephan Livera (02:36)
Gotcha, yeah, so
let’s maybe just back up a little and give us a bit of an overview, like when did Arch start and what are the main products that you guys offer?
Dhruv Patel (02:46)
Yeah, I’d say ART started in February of 2022. And so, ⁓ you know, that was a volatile year just with the end of the at the end of the year, there were there was many firms that were going bankrupt in this space and in the Bitcoin space broadly. But for us, the ART core product has always been Bitcoin back loans. And as I mentioned, it’s like just a flexible product that functions as a line of credit.
allows Bitcoiners to access liquidity to do whatever they need to in their life, whether it’s make investments, handle expenses, things of that sort without selling their Bitcoin. And then what we’ve done is that’s sort of been a great foundation layer product and we’ve built tailored customized use cases on top of it. So one of them is what we call
Stephan Livera (03:29)
Got you, okay. let’s,
can we just, before we go to the customized stuff, can we just sort of get the overarching, like, what’s the interest rate, what’s the loan term you guys offer, ⁓ you know, just some of those kind of high level things that everyone would want to know.
Dhruv Patel (03:38)
Yep.
Yeah, absolutely. So maybe I’ll talk in terms of APRs because our loans have an interest rate and then a one and a half origination fee and the interest rate varies based on the loan size but it starts as low as 8.49 % APR and then the highest APR I believe is 11.9 % at the moment and you know those rates are consistently coming down just as we continue to scale and we offer one year loans that are interest only and at the end of the term
Stephan Livera (03:49)
Gotcha.
Dhruv Patel (04:10)
clients can just roll over into another year loan. And so you don’t actually need to go and pay off the principal at the end of the year. You can continue just paying your monthly interest and doing that for an extended period of time.
Stephan Livera (04:21)
Gotcha. the customers, like, is it American customers? Is it global? Is it non-sanctioned jurisdictions? Who is a potential customer for you?
Dhruv Patel (04:31)
Yep, so we’re licensed and regulated in the US, so we service primarily US-based individuals and businesses, but we also support individuals in certain international jurisdictions as well as businesses more broadly globally as well.
Stephan Livera (04:45)
Okay, so mainly US, but you can support businesses overseas kind of thing.
Dhruv Patel (04:51)
Yeah,
businesses overseas, ⁓ we definitely don’t touch sanctioned regions and things of that sort. And we have a full KYC, KYB process that needs to happen regardless of the jurisdiction. And so, yeah.
Stephan Livera (05:03)
Gotcha, yeah. And then, yeah, maybe just talk to us a little bit about the LTV levels as well. So you mentioned 60 % LTV, so talk to us a bit about that.
Dhruv Patel (05:12)
Yeah, so essentially there’s probably four numbers you need to be aware of here. One is like, what’s the maximum initial loan to value you could borrow? And so for us, that’s 60%. Now, the other three are, okay, at what percent LTV, if Bitcoin rises, do I get to either increase my loan size or access some of my Bitcoin back? And that’s at 50 % or lower. And then the remaining two are in the situation where Bitcoin is falling. At what LTV is there a margin call?
And for us, that’s 70%. At that point, the clients have 24 hours to deposit additional Bitcoin collateral to bring their loan to value back down to 60 % or lower. And if they’re not able to do that, or if the price of Bitcoin continues to fall and hits the liquidation threshold, which is 80 % loan to value, then we will need to partially liquidate to bring the loan to value back to 60%. We never sell all of the collateral, only what’s necessary to bring it back down to a healthy low.
Stephan Livera (06:11)
Gotcha. ⁓ And so, I mean, we should get into the custom uses also. Yeah, let’s talk a little bit of the customization aspects you mentioned earlier.
Dhruv Patel (06:22)
Yeah, so I think, you know, the Bitcoin Back Loans is a powerful tool, but what we realized is ⁓ people have certain use cases in mind, and so it’s easier to build tailored products for those use cases. And so we have two specifically that are live right now, and we’re always working on launching additional ones for ⁓ further tailored use cases. One is called Perpetual Income. You can think of this like the target use cases, maybe folks that are retired or
have a higher amount of Bitcoin but don’t have a W-2 or traditional cash flow stream. Here, what it is, it’s a managed product behind the hood where you deposit say 10 Bitcoin and you can comfortably access $50,000 against that every year in the form of a loan. And so it’s tax-free income for you. And the way it’s done is you start with a very conservative loan to value that you can continually increase over time and Bitcoin’s appreciation should outpace the level of growth on the debt that you’re taking on as well.
So that’s one. And then the second is a product called Tax Shield. And so this is geared towards high income earners where they’re able to borrow against their Bitcoin and invest in mining equipment. And because of the changes in the tax bill, this is now counted as something that you can bonus depreciate against your taxable income and as a result, reduce your tax bill ⁓ at the end of the year. And so for us, those are two that we have right now that are specialized
lending use cases for certain sets of individuals and we’ll continue to build out more of these as we go forward.
Stephan Livera (07:56)
Gotcha. Okay, so as I’m understanding that the first one the perpetual income is kind of like if you want to live off your stack, let’s say if you’re like a higher net worth Bitcoin and you want to kind of borrow against a smaller fraction of your stack and you know live off that and of course, you know, bitcoins volatile but the idea is generally if you’re a maxi you believe Bitcoin is you know going to millions and millions of dollars per coin
Dhruv Patel (08:02)
Yep.
Yeah.
Stephan Livera (08:18)
You want to etc borrow against such that the Kagga of Bitcoin is higher than the interest that you’re paying is kind of the general idea And then the second category there you’re saying is the texture So this is more like for Americans who want to let’s say take advantage of a specific tax deduction that’s available for mining Bitcoin mining equipment ⁓ so
Dhruv Patel (08:26)
Yeah.
Stephan Livera (08:40)
Tell us a little bit about the mining side of that. is that like, do you partner with a mining hosted company for that? Or is it like they will borrow and then they will go find their own mining partner to work with or go and do their own like mining setup?
Dhruv Patel (08:54)
Yeah, so clients are free to do as they wish there. We have partnered with Blockware, so we can certainly make an introduction for clients there. But also, clients can go and do mining themselves or with any other provider they see fit. So it’s flexible from that respect.
Stephan Livera (09:12)
Gotcha, yeah. Okay, so these are the custom aspects of it. And then, you know, just given kind of the price drops and, you know, some of what we were touching on, I guess it probably could be good to just chat a little bit about that, like who should actually do this, right? Because I guess it is like, yes, there is that logic of, okay, Bitcoin kaga is, you know, whatever we think it’s gonna be. Like I look at, let’s say, PowerLore or whatever. For what?
person is it the right thing to do and for what people is it not the right thing to do because maybe they don’t have a you know a big enough net worth to kind of sustainably do this in a you know in a managing in a risk managed fashion rather than like a YOLO fashion
Dhruv Patel (09:56)
Yeah, yeah, absolutely. So I think maybe we’ll separate out into two use cases. There’s definitely the use case of people that are doing it more in the YOLO fashion, right? And they’re maybe barring against their Bitcoin to buy more Bitcoin, and for them that’s a leverage use case. So them aside, I think for the rest of the folks, we support loans as low as $5,000 to well north of $20 million. And what I see consistently, and I think I would recommend is,
Essentially making sure you’re in a position knowing that while we all expect like bitcoins long-term Kagger and appreciation to well ⁓ Outpace any sort of like APR interest rate on on a given loan You need to account for any sort of volatility that comes up in the the interim and so what I would recommend is essentially not using all of your your stack to borrow against like keep
maybe some portion aside for yourself, wherever you’re cussing at, self custody, et cetera, and an additional portion aside to handle margin calls should they come up. And so that way, if anything happens and the Bitcoin price fluctuates downwards over a period of time, your stack is safe, you’re able to handle margin calls as they come up and sleep better at night. The other way to do this also is when you take out a loan, maybe some of those proceeds you keep aside in cash.
So that way if there’s a margin call, you can partially pay down your loan. There’s two ways to cure the margin call. It’s either paying down your loan partially or adding more Bitcoin. So whichever way you do it, just making sure you have contingency plans for what may happen if Bitcoin does sort of decrease in price.
Stephan Livera (11:34)
Yeah, and
I am curious that you have what might be considered a high LTV to start, like 60 % LTV. I mean, can easily, you can kind of get wrecked more easily if there’s like a pretty big drop. So I’m curious why the selection of 60, is that because you’re trying to expand the access for this product, but at the trade-off of, you know, if customers are starting at 60 LTV, like you would’ve got wrecked if you didn’t keep enough aside for like, you know, some of these big drops.
Dhruv Patel (12:04)
Yeah, so maybe, Stephane, that’s an important clarification. We don’t require you to start at 60%. That’s just the maximum you can do. We have many clients that start at 50%, 40%. It really depends on the client’s risk profile, and that’s something they all get to decide before they start the loan. And so, for us, we offer up to 60 % because that’s where we feel is the most sort of aggressive we can do without.
compromising our own risk standards and what we feel comfortable with as a company, but every client is free to decide the level of, ⁓ you know, borrowing that they wanna do from the start.
Stephan Livera (12:41)
Yeah, gotcha. And so, yeah, because I think that’s kind of an interesting thing, like where this goes over time, because like anyone who’s been around for a while knows, hey, Bitcoin has gone through these big drawdowns, like 80 % drawdowns, 75 % drawdowns. You know, even in the 21 cycle, there was like a mid cycle drop from 60K down to 30K before going back up to 69K and then down to like, you know, 16K, the FTX kind of bottom, let’s say. So, you know, certainly it can be volatile. you know, people have to be very prudent in how they manage this and like, obviously,
Dhruv Patel (13:02)
Yeah.
Stephan Livera (13:11)
…
Obviously there’s too many, there’s no one size fits all here. ⁓ I understand that there are some people in the space who have a total zero debt whatsoever mindset. There are others who are sort of, you can do it conservatively and then you’ve got the full YOLO side of the spectrum as well. ⁓ I have been in the more like, you can do it but you need to be conservative and it makes more sense in certain scenarios. Generally higher net worth or business use cases. I think these are the cases where
these individuals or businesses might have, let’s say, cash flow and income, ⁓ or they might have just a high net worth so they can sell some other asset to, you know, but the important point is you do need to kind of stress test, right? Because anyone doing this has to really like…
Pull up a spreadsheet and think about, okay, what if Bitcoin drops? What if, know, like basically, mainly it’s what if Bitcoin drops? And of course, think about all the risks, like how is the provider doing their custody? And what’s the risk on that side? Is there rehypothecation? So let’s talk a little bit about some of those points as well. Talk to us a little bit about the custody on your side and whether there’s rehypothecation, some of these ⁓ concerns that people will typically have.
Dhruv Patel (14:29)
Yeah, absolutely. I mean, I think you’ve already pointed out the two things that like I think the two biggest things that a borrower should be aware of is essentially like how is your Bitcoin held and what’s happening to it if anything Arch does not and has never rehypothecated client collateral, which means we don’t touch it We don’t lend it out. It just sits in cold storage at Anchorage digital, which is a federally chartered bank in the US
⁓ and one of the largest, well, most reputed custodians. so our client collateral simply just sits there. In fact, for loans above $100,000, clients can request that we segregate their collateral into its own wallet and share the wallet address with them so clients can see it 24-7 and know that nothing else has come in or gone out of that wallet, which is a way for us to prove what we’re seeing as well.
Stephan Livera (15:15)
Gotcha. ⁓ And then, yeah, just in terms of, guess, I’m sure you’re seeing this now as well, we’re seeing… ⁓
In the space, there’s different ways to do loans, right? So you have the kind of, you know, just straight custodial style loan, and then there are people doing things like multi-sig and DLC style and, you know, different ways of approaching this loan. How are you seeing this landscape in terms of custodial style, you know, with a regulated custodian versus the multi-sig or DLC style?
Dhruv Patel (15:26)
Thank
Yeah, maybe, you know, I’m not aware of like specific companies doing the DLC one, at least right now. I think some folks that…
Stephan Livera (15:59)
Yeah, so I think it’s
LIGO’s finance and I believe Lendasat might have mentioned some of this also. So that’s, but that’s kind of like a very specific case and I guess the argument would be, okay, instead of putting it into custody, you have self custody, but it’s with a DLC. Now to be clear, there’s a trust ⁓ or there’s an oracle, a price oracle that relates to that. there’s certain elements, it’s a different security model, but just curious to get your thoughts on that, just to compare, let’s say the Arch.
Dhruv Patel (16:05)
Got it, got it, Yup.
Yep.
Stephan Livera (16:28)
model contrasted with other styles.
Dhruv Patel (16:31)
Yeah, so I think each style has its pros and cons and maybe I’ll just like start with the art style and then go down towards the multi-sig and then lastly the DLC and we can talk about this and feel free to chime in if you think I’m missing anything but with the art style, right, like you’re trusting the lender that they are not re-hypothecating, that you’re also trusting the custodian that they select, right? And so for us it’s Anchorage, for other lenders it may be other custodians as well. So that’s the layer of trust that’s built in.
as well as the non-rehypothecation piece. The second is if you look at Multisig, ⁓ in a weird way, yes, multiple people have keys to the wallet and to the coin and you hold one of them, but two of the three, or depending on how you set it up,
there’s enough other holders of the keys that they can move your Bitcoin without your permission. And so, yes, you have a key, but also in my mind, it’s sort of similar to custodial in that respect, meaning other entities control the ability to move your Bitcoin without, and you don’t have the express permission to ⁓ block it or ⁓ enable it. ⁓ And so, with that respect, I find it similar, but also you have one of the keys. So that’s uniquely different than
in
the custodial setup. In both of these situations, where you typically see these companies have a legal agreement for a loan document and the terms of the loan are governed by that document, which outlines the loan amount, the LTV, the margin call, the liquidation, all of these sorts of terms. And then I think on the third piece, you have the DLC. There, the things to think through are like, where are the oracles? How was this actually, it’s similar to like a smart contract in some respect, like, you how was it?
sort of programmed and things of that sort that are more of the risk vectors as well as so you lose maybe some of the pieces that come with using a multi-sig or a custodial solution which is there’s a team that you can contact to maybe get some grace on a margin call window and things of that sort.
Stephan Livera (18:40)
Yeah, yeah, think we’ll see. And I think to be fair, it is early for the DLC style of loan. So we’ll see exactly what happens there. I know Lava were doing that, but they’ve shifted now. So yeah, those are a few things on that. In terms of the loan funding, like are you doing fiat wise? Are you doing stable coins? What’s the plan there?
Dhruv Patel (19:03)
Yeah, so we actually support both. We can do fiat directly into your bank account or stable coins. What we’ve seen is…
Many of our clients actually have real world use cases, whether they’re borrowing to maybe buy their first house or they’re handling real world expenses that have come up, whether it’s a medical bill, a tax bill, ⁓ or just borrowing, they’ve been sort of Bitcoin wealthy, if you will, cash constrained for a while, so borrowing to handle other life events that they want to make happen, whether it’s buying a wedding ring or just having that vacation, things of that sort. And so as a result, most of our dispersals we see are actually
Fiat into people’s bank accounts.
Stephan Livera (19:43)
Yeah, I see. Also, I guess the other thing, I’m starting to see some people talking about this, I’m curious to get your reaction on it also, which is some people are just borrowing against like iBit or against, know, like what they’re doing is they’re going to like a brokerage and they’ve got like iBit shares and borrowing against that because they’re getting a cheaper rate. What’s your view on that?
Dhruv Patel (20:03)
Yeah, so I think essentially rates will converge ⁓ across both of these, especially when you think about it, the reason there’s a disparity of rates is essentially how capital pools fall into this space. All of the lenders here are essentially non-bank lenders, which means we don’t have a set of deposits that we’re able to lend out and arbitrage a lower rate. But as institutions get comfortable lending against iBit, I think the next natural step is, okay, we basically already lend against the ETF.
lending against spot is no different. And so as a result, you’ll see banks and other, ⁓ like maybe the pensions, the insurance funds that often have the lowest cost of capital, start to provide capital to companies like us and say, hey look, like this is the same risk profile as lending against iBit, which we are comfortable with. And so as a result, you’ll see rates drop dramatically and sort of the convergence of the two.
Stephan Livera (20:58)
Yeah, I see. And then,
Dhruv Patel (20:59)
Which they haven’t to be fair, Stephane. When we started four years
ago, APRs were 16%. Now, at the most competitive sizes, you’re talking 8.5%. So we’ve seen a good shrinkage in the interest rate already over a shorter period of time.
Stephan Livera (21:17)
Yeah, and while we’re here, talking, because obviously this is a two-sided market, right? On one side, you’ve got the lending side of the house, and then you’ve also got the capital provider. ⁓ Yeah, sorry, I guess you can say you’ve got the borrower side of the house and the lender side of the house, the capital provider. So on your side, you’re going out to source funds that you can then lend out to your ⁓ borrowing customers. So ⁓ what has the conversation been like with…
on your capital provider side in terms of getting them comfortable with this model.
Dhruv Patel (21:49)
Yeah, so I think we’ve been lucky to find a group of partners. Galaxy Digital is one that is very public and ⁓ a supporter of ours on the debt side. We’ve raised a CLO structure, which is a more traditional financial structure where debt investors can sort of add capital to this structure that we’re able to draw down on to fund our loans. And it sort of all ensures there’s no rehypothecation at all. ⁓ For us, I think the conversations have
just gotten easier over time, where I think it’s a function of two things. Arch’s scale has continued to increase, but second, more and more investors ⁓ on the private credit side or even in the debt world are getting comfortable with Bitcoin as an asset class. The ETF certainly helps. And so I think these conversations, you have maturity across custodians. All of these sort of things help these conversations. And I think ⁓ it’s just a matter of time before we start to see some of the largest banks and pools of capital enter this space.
and really become comfortable with Bitcoin backloads.
Stephan Livera (22:50)
Yeah, especially with the, ⁓ you know, I can imagine if you started in 2022, that was when like everything was blowing up and Genesis and Celsius and BlockFi and all these things were breaking down at that point. ⁓ There’s also been a lot of…
Let’s say, ⁓ focus on security and these aspects just over these years. There’s been a lot of conversation around things like proof of reserves or some kind of proof of liabilities report and other audits and SOC 2 and things like that. Do you have anything else on that side that you’re looking at, like proof of reserves?
Dhruv Patel (23:22)
Yeah, so we are looking at that. We’re a financially audited company. We go through penetration testing and things of that sort on the engineering side as well. And then the one piece I mentioned, which we also do is for loans above a certain size, which is $100,000, we just segregate their assets and that’s a real-time proof of reserves for a specific client saying, hey, look, this is your wallet address for your Bitcoin. You know nothing else will come in or out, but we will be doing a more holistic proof of reserves as well this coming year.
Stephan Livera (23:51)
Yeah, so it’s interesting to see how the space is evolving. Now the other aspect that is interesting now, yes, of course we can talk about self custody and security and DLC model and multi SIG model and custodial model. ⁓ But the other aspect of it is just kind of a UX thing, right? Like certain providers, I guess. ⁓
gonna try to vertically integrate. So they’re gonna, as an example, like a strike in the US, or ⁓ probably some others in Europe and things, where they are trying to offer you, like you can have a loan, but also a card that you can spend out, like directly out of that. How are you sort of comparing and seeing that? Do you see that that’s more like ⁓ a retail or individual product and maybe not as useful for the companies or like offering some of these other financial services around that?
is some customers will want an all-in-one one-stop shop.
Dhruv Patel (24:42)
Yep.
Yep. Yep.
And I think that’s on our roadmap as well. We’ll pretty soon have the ability to buy and sell Bitcoin as well as some of these other functionalities that you mentioned, a card, et cetera. As I think through who the demographic for that is, it depends on the product, right? Whether you’re talking about buy and sell Bitcoin, I think that’s broadly applicable to whether you’re an individual, a high net worth, or a business. Some of the other use cases, maybe like a debit or a credit card, are more tailored towards your individual and high net worth audience as opposed to less
relevant for businesses, although I think it could be relevant across the spectrum still as well. Just a different type of business. Maybe it’s your small and medium businesses that are still independently owned or maybe like owned by a single family or a single like shareholder. ⁓ But yeah, roughly Arch will also be launching these additional products to become a more holistic financial services provider for Bitcoiners.
Stephan Livera (25:40)
Yeah.
And so I’m curious, like what kind of growth you’ve seen. don’t know if you get like some place, some companies will actually disclose like say, Hey, this is the size of our loan book. Are you able to say that or no, or maybe give us a sense of like the growth you’ve seen.
Dhruv Patel (25:54)
Yeah, so I think we started in February 2022. We actually disclosed our numbers as part of Galaxy puts out a research report every quarter. I said the state of crypto back lending and just how different companies are doing. Not all companies opt in, but we’re fairly transparent with that respect. so.
I would say last year we did around $400 billion of originations of these types of loans and the loan book size at the end of this year was in the nine figure range. And so I think for us, we’re just continuing to scale and build off of that memento.
Stephan Livera (26:29)
Yeah, so I mean, it’s a big business and I think this is ⁓ definitely what I’m seeing when I talk to people in the industry, whether they’re like lending and you know, if they’re involved in this aspect of it. So do you see like, where do you see the next kind of angle for growth? it just, know, as NGU, there’s new Bitcoiners who come in and think, hey, I wanna borrow against my stack or like, where do you see the main kind of growth ⁓ side here?
Dhruv Patel (26:56)
Yeah, I think it’s twofold. I think the market for Bitcoin back loans continues to expand with two…
two sort of tailwinds here. One is appreciation of Bitcoin and sort of like the market cap of Bitcoin continuing to grow. ⁓ And second is new adopters. ⁓ I think both of those are tailwinds for Bitcoin back lending broadly. If you look at, I can’t recall the specific numbers here, but if you look at the borrow percentage ⁓ of what people hold on Bitcoin and the rate that they’re borrowing against with respect to any other asset class, whether it’s gold, whether it’s stocks, et cetera, ⁓ for Bitcoin we’re still only
only
a fraction of all the other asset classes. So I think there’s a long way for us to grow there. And I think second specifically for Arch is the continuation of building out additional financial products, whether it’s more structured products that are tailored lending use cases for individuals to meet them at their needs, or it’s being able to buy and sell at some of the lowest rates on the market, the debit card, credit card, things of that sort.
Stephan Livera (27:57)
Yeah, there’s a little bit of a convergence there that like usually once people are doing maybe one or two of these products, then it sort of makes sense for them to start trying to expand and doing the other products also because it’s sort of like you want to ideally have customers for all of what they’re doing in the ideal case. So yeah, I guess just overall like.
There will be some people who just think, no, just stay humble, stack stats, don’t do any debt stuff, and other people who think, no, like use debt. Where do you come down on that? Like, who does it make sense for and who should not use this kind of thing?
Dhruv Patel (28:29)
Yeah,
you know, the question you asked is like just a question that has always sparked debate even outside of Bitcoin, right? Like people talk about the should you have debt in general? you buy should you take on a mortgage? Do you buy a house only when you have the cash ready, etc. Where I roughly land is I think debt can be a very powerful tool to build wealth. But you know, you have to be aware of all the sort of like risks and considerations that come with it. And so
leveraging yourself to the max and borrowing against all of your stack and not having any sort of contingency plan for what would happen if the price decreases, I think is a recipe for disaster. What I would recommend doing is sort of borrow moderately ⁓ against your Bitcoin only for the needs that you have. There’s no need to borrow just to ⁓ have extra cash lying around or maybe for other use cases. Make sure that
the needs you have ⁓ are important for you. You borrow against your stack modestly, and I think that should give you enough breathing room to sustain through various cycles.
Stephan Livera (29:38)
Yeah, and so I guess you started in 22, so users who started with you back in those days, they’ve seen, even now at 66,000, they’ve seen a significant rise. What do you see? Do you see some of the customers are typically closing it out once the price has gotten higher or they just sort of keep rolling it forward, rolling it forward? What’s the sort of exit strategy there that you typically see for customers?
Dhruv Patel (30:03)
Yeah, I think it depends on the specific client, right? Some folks have a target in mind where they’re like, hey, at this point, at this price of Bitcoin, this is where I would like to sell a good portion of my stack. And it just sort of depends on their own entry base. What we’ve seen is we have clients that are now on year four of barring with us. Like they just continually roll it over. And these are the folks that are just very long-term holders and they’re not looking to sell. Other folks, ⁓ if they come into cash from other avenues, maybe they sold
a property that they had, et cetera, they’re able to use those proceeds to pay off the loan ⁓ and just continue holding their Bitcoin. So I think it varies just depending on the specific client and what their situation is.
Stephan Livera (30:45)
Yeah, interesting. And so as you mentioned, there are customers who are able to just fully live off their Bitcoin and just kind of, quote unquote, perpetually keep the loan because obviously they’re kind of relying on this idea of, Bitcoin’s cargo goes up faster than the ⁓ interest rate. And so in theory, like as long as you manage your LTVs and everything correctly and conservatively, over time, your collateral stack
You know, it just grows faster than the loan even though you’re borrowing a new amount every year to live off it.
Dhruv Patel (31:18)
Absolutely, absolutely. It’s just like the cager of Bitcoin outpaces ⁓ the growth of your debt with the interest.
Stephan Livera (31:25)
Yeah, so I guess this is one of those things where people really have to kind of do the numbers, like pull up a spreadsheet and like crunch out some numbers on like what you think the worst case would be and what is your contingency as well. Because I think that’s kind of, you do you have other assets? Do you have income? Do you have like some cash that you can use to pay down some of the loan? These kinds of things because I guess in…
You know, some of these things, can sound easier in theory than it is like when it really happens to you and you’ve gone through, let’s say, a 50 % drawdown just as we did, like from the top at 126k recently down to, call it 60k or whatever it was, you 50 % drawdown. ⁓ So I think it’s just, it speaks to making sure you have conservative ⁓ ratios in terms of like having a low LTV so that you’re in a safe zone.
Dhruv Patel (32:01)
Yep.
Yeah, I think what you said is right, right? It’s easier for, ⁓ it’s hard for people to sometimes to…
think through a scenario like this, but now that we’ve actually gone through it, many people thought, okay, look, some of these drawdowns are done with ETFs and more institutional capital coming into the space, so we might not see such heightened volatility to the downside, but now, obviously, we’ve seen it over the last couple of months, and so I think it’s very fresh in a lot of people’s minds, and something that they’re now able to actually plan for, because it’s very real that they just experienced this.
Stephan Livera (32:49)
Yeah, so any other thoughts on where things are going with, I guess, like even like Tradfire banks, are they going to start offering a similar product? ⁓ And then what happens then? Like, is it more like you will end up competing with them or like white labeling with some of those services or maybe they buy you out or you become a bank?
Dhruv Patel (33:09)
Yeah, yeah, so I think like it’s a mix of all the above, right? If you look at it traditionally, ⁓
There is a few ways I see banks entering this space, and I think they will. One is they can provide capital to Arch and other such companies and say, I don’t want to be in the business of managing hundreds of thousands of loans on a 24-7 basis just because Bitcoin is 24-7 with margin calling and all of these sorts of situations. It’s easier for them to say, Arch, here’s a billion dollars. Go manage a Bitcoin-backed loans book. And that’s an easy way for the banks to function.
Second
is white label, ⁓ which we’ve been approached by ⁓ various institutions, whether it’s your smaller banks, credit unions, things of that sort. And the third is some banks will elect to build this in-house. And I think this market is large enough that multiple players will have a successful product and ⁓ a fair amount of users. But it’s a little early to see how exactly it’ll play out from that side.
Stephan Livera (34:11)
Any other ⁓ thoughts on where things are going? Any predictions on the Bitcoin lending market?
Dhruv Patel (34:19)
⁓ You know, I think my rough prediction is like even through the heightened volatility that we’ve been seeing, the education and awareness of this product continues to grow. And as we start to see the cycle turn around, as we start to see price depreciation, increased adoption, ⁓ the market size for Bitcoin back lending will just continue to scale.
Stephan Livera (34:42)
Yeah, so I think it’s an interesting space, ⁓ certainly a place with risks. just want, can’t reiterate that enough for listeners that this is not the thing to just go and YOLO on it. Of course, you’ve just seen a big draw down, but it’s probably…
Right now, it’s probably more center, top of everyone’s mind because we’ve just gone through a 50 % drawdown, let’s say. Whereas maybe the time, ironically, might be sort of like, I mean, of course, we could drop further from here, right? But ironically, it’s sort of the time, the customers and the people who are maybe engaging in this stuff, like when it’s kind of lower, they sort of see that upside more, where it’s like.
maybe during that kind of hype time people are kind of euphoric and they’re feeling like ⁓ number is only going to go up and then maybe that’s where people get into more risk because they haven’t thought enough about their LTV and you know their contingency plans.
Dhruv Patel (35:29)
Absolutely, you know, this is not advice, but I feel like right now is probably a safer time to borrow or like to enter a loan than previously just because we’ve already seen a big drawdown as you mentioned, like we could go lower from here, but I feel like odds are we’re near a bottom and so the chances of a margin call or liquidation threshold being hit if you start borrowing now is much lower ⁓ than previously.
Stephan Livera (35:56)
Yeah, but yeah, as always, ⁓ listeners, you’re big boys and big girls, so make sure you do your analysis. Himanshu, where can, sorry, Dhruv, where can people find you online?
Dhruv Patel (36:06)
Yeah, so I think the best way is if you could just go to ArchLending.com and there is a chat button, you can book a video call with someone for the team. I’m on ⁓ Twitter quite frequently as well as our company Twitter. Maybe we can link the socials wherever Stephan you seem ⁓ fit, but ArchLending on Twitter, I’m at Drew Patel, ⁓ underscore 34, and so I think those are roughly the best places for us to be in contact.
Stephan Livera (36:33)
Excellent. Well, thanks for joining me, Drew.
Dhruv Patel (36:35)
Awesome, thanks for having me, far.