The Crypto Mortgage Arrives (At a Price)
Plus, how Palantir profited from Russia's invasion of Ukraine.
Number of the Week: -63% (explanation below)
The Crypto Mortgage Arrives (At a Price)
One thesis you hear from cryptocurrency advocates is that the constant gut-twisting price volatility is a function of the assets’ novelty; low liquidity (relative to, say, the $119 trillion global bond market); and scarcity of price signals. As the market matures, and as scaffolding around crypto is erected, the thesis holds, crypto volatility will come down and everyone will get rich in a more stable fashion.
This week, a piece of the scaffolding fell into place, as Miami-based lender Milo announced a $17 million Series A round. One of Milo’s principal offerings is what it credibly claims is the first 30-year mortgage in the United States that can be backed by cryptocurrency as collateral. For a couple of years, Milo has been offering conventional mortgages to non-US citizens who want to purchase homes in the US. Milo’s Miami location is relevant, in that Florida has been the most popular state for nonresident property purchases in the US for more than a decade.
As Milo founder Josip Rupena explained to FIN, this was kind of a warmup to the crypto mortgage, for which a waiting list of thousands has amassed. The typical nonresident lacks credentials usually required to obtain a US mortgage, such as a credit history and a Social Security number. So Milo has had to learn how to comply with know-your-client, anti-money-laundering, and similar rules that come very much in handy as Milo pivots toward the crypto mortgage.
One crucial question: If the prospective buyer has no US credit history, how does Milo know the risk-appropriate interest rate to charge? Rupena told FIN that Milo looks at a variety of factors: net worth of the borrower, value of the property, cash flow, etc. To date in its noncrypto mortgages, Milo says it has been lending at 3-5%, which is broadly in line with prevailing rates.
How does the crypto mortgage actually work, though? If a customer wants a mortgage for $100,000, say, how much crypto would she have to put up? Rupena told FIN, maybe a little sheepishly, right now…$100,000. On the one hand, that’s crazy steep; on the other hand, there are almost certainly a few thousand crypto investors who’ve pocketed such insane returns, thanks to market timing, that this 100% requirement is not even a concern. “That number will come down over time,” Rupena told FIN. Milo customers will also have the ability to pay off their mortgages using crypto, which could be a tremendous boon for those who can time it right.
The VC firm that led Milo’s Series A is Los Angeles’s M13, historically known more for investing in household and direct-to-consumer brands (Bonobos, Daily Harvest), although its investment in Lightning Labs was an important foray into the crypto space. M13 just created a $400 million fund that will focus on Web3 and related areas.
M13 no doubt understands its risk profile better than anyone else; the interesting thing is that scaffolding businesses like Milo tacitly assume a crypto market that broadly goes up over time. In the decade or so that crypto has existed, that’s been a more-than-reasonable assumption, but the reduced crypto volatility that such companies are supposed to create might shift the market: how it performs, who enters the market, the risk profile versus other asset classes, etc.
FIN continues to believe that the single-most important question in the crypto universe is: What, exactly, happens to the existing “private” digital currency market if and when central bank digital currencies (CBDC) go mainstream in large global economies? We’ve had a glimpse of this in China, which last year booted Bitcoin miners from the country while simultaneously rolling out a digital yuan to tens of millions of pilot customers. The much-touted Biden executive order issued this week “directs the U.S. Government to assess the technological infrastructure and capacity needs for a potential US CBDC in a manner that protects Americans’ interests.” Obviously a US CBDC is years away at a minimum, but if it becomes a reality, will that suck the air out of markets for crypto like Bitcoin? If it does, a scaffolding company like Milo presumably loses a lot of potential customers.
Palantir’s Golden Bet Pays Off, For Now
A lot of people were surprised in August when a Palantir earnings statement revealed that the company had purchased $50.7 million worth of 100-ounce gold bars. FIN tweeted at the time:
It was definitely counterintuitive; the more fashionable 2021 move was for companies (such as Tesla) to hold Bitcoin on their balance sheets. And for a few months the fashionable move looked far more lucrative. But starting in November, when the prospect of Federal Reserve interest rate hikes began to look more certain, Bitcoin began a historic price slide. And then, with the Russian invasion of Ukraine, the price of gold crossed $2000 an ounce for the first time in a year and a half. As of Friday’s gold market close, Palantir has made a theoretical profit of more than $5 million on its gold buy, whereas it would have lost about twice that amount had it bought Bitcoin and held on. We don’t know on what exact date in August Palantir bought its bars, but this chart shows the progress since mid-August:
Because Palantir is Palantir, with its whizzbang data crunching and its longstanding connection to the CIA, there will always be people who wonder if somehow the company predicted the Russian invasion or something similar. After all, when the gold purchase was made, Palantir’s chief operating officer said in an interview: “You have to be prepared for a future with more black swan events.”
You Read It First in FIN!
On Friday, the US Securities and Exchange Commission (SEC) issued an order against Alumni Ventures Group (AVG), a venture capital firm that stood out for trying to associate itself with Ivy League (and other prestigious) universities and their alumni. The SEC charges that for years, AVG misrepresented its operations to investors, and also illegally transferred millions of dollars between its funds. AVG was also charged this week by the states of Massachusetts (where the business is registered) and New Hampshire (where its CEO Michael Collins lives).
Alumni Ventures Group is the latest private investment firm to get in trouble for saying one thing and doing another, when it comes to the fees it charges to limited partners.
Driving the news: The SEC found that AVG told LPs in marketing materials that they would be charged the "industry standard" of 2% management fees and 20% carried interest. But, rather than charging the management fees on an annual basis, as is industry standard, AVG charged 20% upfront (i.e., 2% times 10 years).
Regulators also found that AVG comingled [sic] funds without informing LPs.
AVG agreed to repay $4.7 million to affected funds and to pay a $700,000 penalty. Also, AVG CEO Mike Collins agreed to pay a $100,000 penalty.
FINvestments
🦈Number of the Week: In the last week of February and first week of March, VC firms poured about $1.1 billion into 51 fintech companies worldwide. That may sound like a lot of money, but it’s down 63 percent from the previous two-week period, according to Crunchbase. Some of that decline is attributable to Ukraine jitters, but as we noted in December, 2021’s fintech growth “was so feverish that it’s hard to imagine 2022 repeating it; there are several signs indicating a slowdown.”
🦈“Uber for the trucking industry” is a proposition we’ve heard for several years, and presumably if someone had successfully delivered it, we’d stop hearing about it. This week an unusual regional alliance emerged: the Israeli funder Liquidity announced it has provided $40 million in funding to a Saudi-based “Uber for trucking” called TruKKer.
nice