Today, the firm announced its Build Secured Income Fund I, a fund that will invest in “over-collateralized consumer and business loans” backed by Bitcoin. It’s a direct lending fund, although the loans will be originated and serviced by a different entity, a Bitcoin financial services provider called Unchained. 

These days, private credit is almost as hyped as Bitcoin was a few years ago. So this is two very buzzy markets coming together, and the rhetoric kind of reflects that. We spoke to Build’s CIO, Matt Dines, who explained the genesis of the fund:

“You've got an emergent system that's disrupting from below and that is Bitcoin. [You’re seeing] this emerging system of internet based, trust-less money pulling itself up by its own bootstraps. You are seeing the liquidity market for Bitcoin just continue to grow.” 

Questions? Yup, us too. 

For investors, the selling point seems to be liquidity. In a regular corporate or consumer loan, if the borrower defaults you generally have to wait for a bankruptcy or restructuring process to play out before you get any cash recovery. This can take months, years even. 

It’s a long process, and it’s also fraught with uncertainty. Because the collateral is often illiquid, it’s sometimes hard to get a read on what your eventual recovery will be. Bitcoin is a lot more liquid, so with the loans Build is offering, lenders can get instant access to the collateral and turn it into cash. 

There are some caveats. One is that this process exposes you to the slower transaction speed of cryptocurrency compared to real cash; perhaps a bigger problem is that Bitcoin is one of the most volatile asset classes out there, so it’s not like you’re guaranteed a full recovery.

Build has thought of that, so it is smartly requiring significant overcollateralization. If you want to borrow $100k, you would need to put up around $250k of Bitcoin at the time of that origination. 

If you had $250k of Bitcoin lying around, why would you use it to borrow less than half that amount? Why wouldn’t you just sell the Bitcoin and generate $250k of cash?

Well…if you sell the Bitcoin, you no longer have the Bitcoin. If Bitcoin goes to the moon, you’ve left money on the table. The product Build is offering is kind of like a margin loan — it’s not that different to Elon Musk borrowing against his Tesla stock to fund his equity investment in Twitter. 

How much does it cost to borrow?

It’s not cheap. Build’s fund will typically issue loans with a 12-month maturity at spreads of S+800bps to S+1000bps and a loan to value ratio of 40%. Then, of course, you’ve got to provide 2.5x the value of the loan in the form of Bitcoin.

And how do lenders get access to that collateral? 

The borrower’s Bitcoin goes into a so-called multisig vault, a type of crypto wallet that requires multiple “keys” to move capital. For certain actions to be taken, multiple parties have to sign off on the transaction by using their keys. While we’re not experts on multisig vaults, that sounds relatively secure — although the requirement for multiple sign-offs presumably slows things down, and cuts against the idea of an immediate recovery.

Perhaps most importantly: who are the borrowers, and what are they doing with the money?

Some of them are consumers (or “adopters” in the parlance of the crypto industry) who have a bunch of Bitcoin lying around and want to fund “a home improvement or something like that,” according to Dines. Others are businesses, and Dines gave an example of one such borrower he met at a crypto conference:

You're looking at an environment where we've clearly got two things: a shortage of dollar capital and bank capacity has come under constraint, it's harder to get dollar loans right now. If you're looking for commercial and industrial, you're a small business or your risk profile that banks don't want to run into, if you're like this individual, who represented a dry cleaner, family-owned business in Florida, what he actually ended up doing, he tweeted back at me that he'd become a lending customer. He's using his Bitcoin on his balance sheet as a Bitcoin adopter who wants to hold Bitcoin as a store of value asset. He's utilizing his Bitcoin on his balance sheet to collateralize and fund his own working capital cycle. He's invested in dry cleaning equipment […] just property plant equipment to run his business and provide goods and services into the economy.

Perhaps the bigger question is what the credit profile of these borrowers are. What’s the Venn-diagram overlap between creditworthy small business and creditworthy small business owners who have large crypto investments? On the consumer side, what kind of credit profile of the average small-time to medium-time crypto whale?

We asked Dines for his assessment of the total addressable market for this kind of lending, and he said he didn’t have a number. But Build isn’t the first firm to experiment with bitcoin-backed lending — last April, Goldman Sachs joined the ranks of Silvergate Bank and Signature Bank in providing Bitcoin-backed loans. 

Both Silvergate and Signature have since closed, after the regional banking crisis earlier this year. That doesn’t necessarily mean anything. Margin lending on crypto isn’t an inherently bad idea. 

But it definitely raises some interesting possibilities. For example: could you do a Bill Hwang-esque trade by buying a bunch of crypto and then using it to raise margin loans to…buy more crypto?