Huobi has launched a service allowing users to mortgage their bitcoins in return for Chinese yuan (CNY) loans to purchase real shares on the Shanghai Stock Exchange.
The platform, Caimao, allows investors disappointed with the recent slump in bitcoin price to put that value to use in an asset class that has grown 125% in the past year.
Customers will use the Caimao platform to deposit their bitcoins and also buy and sell individual shares of their choice. They can borrow up to 60% of the BTC deposit value.
Funds for borrowing are supplied by a third-party provider.
The move takes some pressure off exchanges like Huobi, as Chinese investors cash in their coins to try their luck on the more bullish Shanghai Composite Index.
Loans are offered on a daily (0.1% interest per day) and monthly (1.2–1.7% interest per month) basis. Customers could theoretically take out loans for six months to a year if they expected returns to exceed the interest owed, though Huobi anticipates it will be more attractive to short-term traders.
At completion of the loan’s term, the customer pays back the borrowed amount plus interest, and then withdraws the initial BTC deposit amount – plus profits or minus losses.
Risk management mechanism
Juggling the value of multiple investment options at once might seem risky, but Huobi said it has a risk management system in place that works similar to those of margin trading platforms on other bitcoin exchanges.
The Caimao platform calculates a ratio based on money balances and the changing prices of both BTC and the shares purchased. If a customer’s ratio falls below a certain set figure the position is liquidated, with shares and/or BTC being sold to cover any losses.
A customer whose shares suffered a net loss at the same time as a drop in bitcoin’s price would be more at risk of such a liquidation.
Huobi says it will hold the bitcoin amounts as collateral for the loan, selling it only if necessary to cover any losses.
Due to the deep liquidity of both Huobi’s bitcoin exchange and the Shanghai Stock Exchange, plus the platform’s execution speed, the company is “confident” any forced liquidations can be completed at the target price.
BTC as collateral
While Caimao is the first product aimed specifically at trading on the stockmarket, some Chinese exchanges, including Huobi, have deployed the BTC-as-collateral model for some time now.
Last year BTCTrade launched the Yuanbao loan service, which also allows customers to borrow up to 60% of their bitcoins’ value for whatever purpose they wish. Yuanbao also let users set their own interest rates and term limits within recommended parameters.
Huobi’s Dangpu.com service, which will continue operating, also works on similar principles.
Opening world markets to all
At this stage, the loans will be available to mainland Chinese citizens only, but Huobi’s Robert Kuhne told CoinDesk the aim is to offer the service to everyone as soon as possible.
He said Huobi is building another service similar to Caimao “but much more global in scale”.
“Huobi’s long-term vision is a world in which anyone anywhere can invest in anything. Five years ago, the idea of connecting all of the world’s capital markets and providing equal access for every person would have seemed like a fantasy, but bitcoin has provided the conceptual and technological foundation for this vision to become a reality.”
“It certainly won’t happen overnight, but this is Huobi’s strategic direction and Caimao is our first step,” he added.
Kuhne also stressed that the Shanghai Stock Exchange shares offered on Caimao were genuine shares, and not just virtual assets representing them.