A crypto-backed mortgage, with Phil Blows

In February, I spoke to Phil Blows about backing traditional loans with digital assets. The crypto markets had a rough time in the months that followed, so I wasn’t expecting much progress on that front, but I was wrong. Bull markets are a great time to build, after all.

So I have Phil back today, talking about ByBrix and their new crypto-backed mortgage offering.

And sure, to crypto outsiders like me, this might feel like a scary time to be building in this space, but as Phil reminds me, “a lot of these people didn't get into crypto to then move back into fiat, they go into crypto because they think they're going to stay there for the rest of their lives. So it's more that they're dabbling in the world of fiat, but living their lives in crypto.”

There’s a significant demographic out there who have built wealth in crypto, and would like to keep as much of their wealth there as possible, even as they look to finance a home.

You can learn more about ByBrix at their home page https://bybrix.io/ (or on their LinkedIn)

While you can find more on AQRU at https://aqru.io/ (plus Phil has been on before, on episode 29, talking about crypto and AQRU)

You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24

If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.

Regards,

Brendan

The full written transcript, with timestamps, is below:

Phil Blows 0:00

You get two elements to the loan against the crypto. The first is a 30% down payment, which is against the crypto - completely variable and there's no tie ins. And then the 70% is a traditional mortgage which has a lien against the property as well.

That tends to be where a lot of crypto natives struggle, is that they have the funds but they often don't have the ability to get traditional mortgages, and banks are kind of unsure about them as as as borrows.

Brendan Le Grange 0:31

Welcome to How to Lend Money to Strangers with Brendan Le Grange. In episode 29 of this show, I spoke to Phil Blows, co-founder and CEO of AQRU - a listed exchange paying fiat interest on crypto deposits. It was a move that I thought might be a small and early step on the path to a broad loan against crypto marketplace. Then stuff happened, markets bled, and I figured we'd added a few years to that timeline.

But all of a sudden, I read an interesting press release. And so I invitedPhil back to tell me more.

Right, well, Phil Blows, welcome back to the show.

You're the co-founder and CEO of AQRU, and you're also a returning guest, having appeared on episode 29, all the way back in February. But for those who maybe haven't listened to that one yet, could you start by giving us a quick background on who you are, as well as what AQRU is and what AQRU is doing in the crypto space?

Phil Blows 1:43

Sure. Yeah, my name is Phil Blows, I'm based in the UK and founded a company called AQRU which aims to be the safest place to invest in crypto. We're listed on the London Stock Exchange, well-capitalised (especially important given the market conditions that we've seen in crypto over the last six months), and we appeal to professional, or people who are trying to be professional about their crypto investments, and looking for a place where they can get exposure to quality coins, or indeed just investment solutions which allow them to get broad exposure to to crypto markets, but also earn yield as well. So some people who are holding crypto, they don't know that they can actually earn interest on that crypto. So we provide that service as well.

When someone logs into the app, there's going to be three services that they see: the first is exchanging fiat or other cryptocurrencies into other coins; second is yield, so depositing their crypto and earning yield at market leading yields on the crypto that they hold with us; and the third is indexes, so effectively, one click execution and you get broad-based exposure to several crypto assets.

So really just designed to be a safe, easy place to invest in cryptocurrency.

Brendan Le Grange 2:47

Yeah, and when we were last speaking, it was on that idea that this paying of fiat interest against crypto holdings was maybe a first step on the path down to a world where lenders would see crypto assets as something they could hold as collateral, like they might with a share portfolio, and make loans to consumers so their consumers wouldn't have to liquidate holdings.

At that point in time. One of the big hurdles we foresaw was that volatility in the crypto markets. And before we really get into the main topic of today, I see that within AQRU you've been working on helping consumers to manage volatility with AQRUOTen.

Phil Blows 3:27

The first thing I would say is a lot of commentators in crypto are crypto maximalists. They almost say it's everything in crypto or nothing at all. And we're very much against that message.

What we believe is that crypto currency has been the best performing asset class for the last 10 years or so, but at the same time, it remains highly volatile and high risk. So shouldn't be more than, say 10-15% of your portfolio. But it should be a part of a diversified portfolio, which you know, when you look at things like stocks, bonds, and property, I should sit alongside that.

And you look at the average crypto exchange, and you'll find 5,000 coins that they've listed. And most people haven't got the time or inclination to want to get involved and try and work out which coins to buy. That's where AQRU comes in. And we've launched two products, first is AQRUTrend and the second is AQRUTen.

What AQRUTen is simply a basket of the top 10 crypto assets, weighted by their market size. So that means, predominantly you get exposure to Etherium and Bitcoin, but also you get exposure to those emerging next eight tokens, which hopefully over time, if they're decent projects, will add considerable returns to the portfolio.

The second is Trend, and what Trend does is, it's aimed at increasing your exposure to crypto, if there is a solid trend in the market established. And one thing we've seen with crypto is over the last 13 years since it first arrived, it's been highly cyclical in the way that it's trading, you've seen these massive in frontlight price appreciations followed by one year/ 18 month's worth of declines.

And this cyclical type of price action actually lends itself, or historically it has lent itself, very well to trend following systems. They're super basic look at the price now, relative to the last three months, if the price now is higher than it has been over the last three months, buy, if it's lower, do nothing or sell.

And that strategy has performed phenomenally. So we built that into the app as well, where you can essentially get exposure to that AQRUTen portfolio, but you're timing your entry by using this Trend products. And to give you an example over the last two years, Bitcoin has returned something like 120-130%, but the Trend product is returned over 700%.

The Trend product will never buy the bottom, sell the top. But hopefully we'll capture 75% of these big rallies that you see. And that's what it did the last cycle. And interestingly, it's just started buying now.

Brendan Le Grange 5:54

Yeah, and I guess helping investors and consumers to avoid the panic that can come - I think crypto is most exposed to this, it's always in the news, so when prices are going down, it's in every headline, when prices are going up, it's in every headline, and that can add stress to the consumer who is sitting there with a holding and trying to make a decision. So it's good to hear that they've got these investment tools that can help do that with a little bit more structure than just seeing what's on TV and rushing and hoping you don't miss out.

Phil Blows 6:22

Exactly. And yeah, this is something I use myself, I'm just as susceptible to this sort of investor behaviour where you panic when it's at its lows, and you get greedy at its highs - and the systematic approaches takes out that human bias, you've mentioned.

Brendan Le Grange 6:35

Obviously, we have had a long run of downward price pressure. And that's true in the stock market as well, but maybe more exaggerated in the crypto world. And that happened I guess about two months after we last spoke, we saw a big downward turn on all fronts. And so if I'm honest, I didn't expect much in the way of news to be coming out on their journey towards a world where crypto assets are seen as something that could be used as collateral for real world fiat loans.

And then all of a sudden, a couple of weeks ago, I saw you announcing an interesting new project...

Phil Blows 7:08

So ByBrix is really founded from speaking with a lot of larger crypto holders in our client base. And they're saying I really want to buy a property, but most of my net worth is tied up in crypto right now. So what we said is, let's design a mortgage product whereby you don't need to sell the underlying holding, you can simply use it and borrow against the crypto.

And to be clear, that's the leading crypto, so at the moment, it's Bitcoin and Etherium. Potentially over time, it might be tokenized gold, tokenized S&P index trackers, things like that, be it just for the very same reasons that you spoke about at the start, these which is allowing people to hopefully experience the continued upside of Bitcoin, especially now as we see inflation begin to appear in the market.

I mean, one of the worst investments you'll ever make is the fiat downpayment in your property. We're trying to give people more options to use different types of collateral, hopefully inflation proof collateral, when buying property. And ByBrix, just makes that process very, very simple.

We've got an amazing team based out in the US. Troy Huerta who's our CEO, started as a mortgage banker, 30 years experience in mortgages. So he's bringing that kind of network and traditional understanding of the normal mortgage market and putting the crypto spin on it. And yeah, it's a product that at the moment with property prices coming down and sort of interest rates going up.

And obviously, crypto is having had a bit of a tough run, so demand isn't crazy right now for it. But we know that this is sort of where the puck is going to, a really exciting products. And I think one that we're gonna see significant continued traction on this market stabilise.

Brendan Le Grange 8:41

I don't have huge crypto holdings myself, but I've got some shareholdings that I'm now using for a property purchase. And I understand that sort of stress of needing to buy a house at a time when it's really not ideal in the market if you have to liquidate as well - do I wait another day? Or do I wait another week? Is it going up? Or is it going down? These are stresses that shouldn't be tied to something like buying a house. So it's interesting to hear new tools to make that work.

In simple terms, how does it work? How would somebody who's got significant Bitcoin holdings use ByBrix.io?

Phil Blows 9:13

So the way it works is, say someone wanted to buy a property for $500,000 for argument's sake. They would need to deposit $500,000 worth of crypto with us - so its a 100% loan to value against your crypto - then you get two elements to look at the loan against the crypto. The first is a 30% down payment which is against the crypto, that's completely variable and there's no tie-ins, you can at any point repay it or move it elsewhere if need be. And then the 70% is a traditional mortgage which is sort of has a lien against the property as well.

That tends to be where a lot of crypto natives struggle is that they have the funds that often they don't have the ability to get traditional mortgage because they don't know the providers don't know the market and banks are a kind of unsure about them as as borrowers so we've obviously got a network throughout the US and globally, whereby we know the crypto friendly lenders in the traditional world of finance, and we can then help them with downpayment via the ByBrix financing side of things - which actually uses a lot of decentralised financing liquidity sources to help pay for that downpayment loan.

So, simply put it's, one to one loan to value. And that 100% loan to value is comprised of a traditional mortgage and a crypto downpayment kind of variable, variable loan.

Brendan Le Grange 10:26

OK, so yeah, it's end-to-end, it's not a case of the down payment, then the consumer has to find a mortgage, they're getting it all in one place. I guess, the question is coming back to that idea of volatility, if I look at the product design, you've built yourself in some protection with the formal mortgage component as well. But is there something like a margin call? If prices drop do consumers need to top up the crypto holdings?

Phil Blows 10:52

If there was a huge collapse in crypto prices, there is a margin call.

But to give you an idea, just so you did this whole deal with this property deal, when Bitcoin was at $20,000, we would be margin calling that individual at $13,000. When Bitcoin was around 13,000, trying to get them to top up and improve the health of the loan. If that loan, then gets down to $10,000 we'll then be saying that we need to liquidate a portion of your Bitcoin. We would be selling the Bitcoin and paying back the loan.

So the worst case scenario for the customer whereby the Bitcoin essentially does a slow dive to zero is they never lose the house or the downpayment, the house isn't tied to the price of Bitcoin, for example. So the worst case scenario is that cryptocurrencies essentially liquidated to pay off the downpayment element of the mortgage, that's where the safeguard is for both the customer and for us as a business.

Brendan Le Grange 11:42

Yeah, and we've obviously seen prices drop, but I think in some ways, price is dropping, and then holding. And now again, the last couple of days, returning upwards. Again, it actually gives us a little bit of confidence, I suppose that we've seen seen ups and downs, and they have been dramatic, but still, in terms of the ranges you're talking about, is a lot of leeway. If it's not a case of sort of day to day, price changes are going to be a problem,

Phil Blows 12:07

Exactly that. And that's why the underlying downpayment loan is over collateralized to an extent where we're not jumping on the phone, trying to look for margin all the time, it needs a significant move in crypto on that, you know, we obviously have back tested, it's not to say that crypto's most volatile days aren't ahead of it. So we've got to be careful. And we've got a stress test these things.

But it's trying to make sure this isn't something where the customer is constantly looking over their shoulder waiting for a margin call sort of thing. So we need to give people enough room to kind of live their lives without having to worry about Bitcoin.

Brendan Le Grange 12:36

You said the team is based out of the US, is that where the early mortgages are going to be opened? Or given that crypto is a global asset class, is this something people can take to any country?

Phil Blows 12:50

Yeah, we're encouraging clients from any country because it tends to be that we can find the right mortgage lender in each jurisdiction. And yeah, so to global products. We know that at the moment, the US and especially states like Florida, Arizona, Southern California, these tend to be the areas where we think there'll probably be the most demand. And it's certainly where we see the most demand from consumers right now.

And you know, there are a couple of competitors in the space who started doing their first loans, that sort of things. It is early market, but is one that does exist already.

But I think globally, this is something that we see as a big shift. This is kind of blockchain technologies, almost one of its real use cases, the ability, as I say, to collateralize, inflation protected assets and borrow against them more easily than maybe you ever have done before being able to tokenize assets, whether it's art, whether it's your the s&p portfolio that you might have, yeah, I think that is a global problem, that people have assets that they can't borrow against simply and it's not going to be restricted to just the US.

Brendan Le Grange 13:47

And this in a world where there's more freedom to move around and work from anywhere. I think it's certainly an interesting move in the marketplace and a lovely linkage between the most traditional of all lending types, of the mortgage, with something like crypto.

You're obviously dealing with people with significant crypto assets. So these are probably fairly sophisticated investors who've been in the game a long time. And I'd be quite interested if if this group of high net worth from the crypto space, how they overlap with traditional credit, are these a different sort of customer that maybe traditional banks weren't speaking to in the past?

Phil Blows 14:27

There is a mix, but the really large crypto holders tend to be ones who were just very early to the space. They are an underserved market and a lot of their holdings remain in crypto.

A lot of these people didn't get into crypto to then move back into fiat, they go into crypto because they think they're going to stay there for the rest of their lives. So it's more that they're dabbling in the world of fiat, but living their lives in crypto as opposed to the reverse. |That's the kind of odd customers that, I say odd customers, is the kind of customers that we're seeing that typical banks just don't have exposure to which I think will make it quite an interesting space in the future. Especially if they begin to move into the space themselves.

Brendan Le Grange 15:03

So value created for the system in a couple of ways. You said that in terms of timing, with the larger pressure of rising interest rates, maybe just the market losing a bit of steam, not everybody's rushing out to invest in real estate right at this moment. But in terms of your early response, you've obviously had a few headlines, what are you hearing in terms of excitement to try it out and to use it to to buy some properties?

Phil Blows 15:27

It's been really encouraging. I think what we're what we're finding, which may be a bit of a surprise is because of the way that we financed this, and we're using, you know, a mixture of traditional finance and decentralised finance to come up with the loans. And at the moment, decentralised finance is the cheapest place in the world to borrow money, especially with interest rates going up, it remains untouched.

So what we're finding is that part of why we're getting such good demand is the rates that we're actually able to offer, especially to customers in the US who you know, typically seeing that kind of 30 year mortgage rate topping 6% likely to go higher, you know, we're finding that there is there's short term financing solutions via decentralised finance right now, which you can get for 4% to 5%. So you're cutting a couple of 100 basis points off for a lot of borrowers. So I think what we're what we're finding, as well as, not only are we getting the crypto natives, but customers who are looking to refinance and thinking, 'is there a better way I can do this now that we're going into a slightly higher rate environment?'

So yeah, it's a all we really need to see, which is what we're actually seeing right now. It's kind of a stabilisation of crypto prices. And he will say, is this the right time to found the business? Well, would I prefer to found it at $68,000 - when bitcoin was at $68,000 - and now crypto drops, 80%? Probably not, you know, I'm happier here at the lows.

And you know, we always say build in bear markets to exploit the next cycle, and crypto is cyclical, it's gonna take some time to get back to where we were. But I think it's also going to take time to build a product, make sure you build this business, get people to know about us and that sort of thing. So hopefully, this is the ideal time to be launching it that it hasn't when people are really pushing back into crypto, again, that we're there front and centre where the product is battle tested.

Brendan Le Grange 17:09

The big question was always when is it going to fall, and if it falls, how much.

And as you said earlier, when you've got that as your down payment, you want a little bit of security. And I think after it's fallen, yeah, I think it's a good time to be trying something like this out. If people listening would like to learn more, they want to investigate the offering, maybe even want to get involved, where can they go to learn more about buying bricks and the product.

Phil Blows 17:32

So probably the best point demand is ByBrix.io

Troy Huerta, our CEO, and myself, we've built a great team already, please reach out, go on the website, you know, sign up for the newsletter or request a call back, we're here to help.

There's also a mortgage calculator on there that people can kind of know play around and what crypto they hold and see what kind of house they can afford to buy with it. So those would be the best ways. But you know, or just hit us up on LinkedIn, you know, where we try and try and get back to as many people you possibly can and love hearing directly back from customers. Because it's, you know, it helps us develop the product.

So we're really keen that people reach out, please don't hold back.

Brendan Le Grange 18:11

If they do follow you on LinkedIn, I see Troy does a weekly update so you can really stay in touch quite easily to see what's happening in a space that even if you're not ready to invest, even if your holdings aren't large enough to give you ideas of becoming a real estate investor, if you're just interested in what's happening in crypto, what's happening in real estate there. Yeah, I'd encourage you to sign up and just these weekly updates in a model.

As we said, when we spoke six months ago, this is going to be accepted more and more. There's obviously some questions about how to make it work. And you're one of the first ones to try and model so I think anybody who's interested in where lending might be in 10 years time is going to do well to have a look at what you're doing and watch how that grows as it all settles and hopefully Yeah, we can enter a world with a little bit more stability in our markets in all markets and we can see how these different business models grow so far.

It's been great chatting to you again, thank you for your time.

Phil Blows 19:04

Pleasure. Thanks as always for your support and and much appreciated.

Brendan Le Grange 19:06

And thank you all for listening. If you enjoyed that, please do rate and review on your preferred podcast platform and share widely including on LinkedIn. And while you they send me a connection request.

The show is written and recorded by myself Brendan le Grange in Brighton, England and edited with assistance by Kane Hunter. Show music is by Iam_Wake and you can find full written transcripts, show notes, and more content at www.HowtoLendMoneytoStrangers.show

And I'll see you again next Thursday.