SERIES: The Most Confusing Economics Concepts Explained: Inflation vs. Deflation

Inflation and deflation are common economic terms that can be a bit confusing. They aren’t always addressed in school, but they affect our lives in so many ways. While the causes and consequences of inflation and deflation can be complicated, their definitions are surprisingly simple. Here is what you should know about these two terms and their role in a greater economy.

What is inflation?

In the simplest terms, inflation occurs when the price of goods and services goes up over time. It can happen slowly, over decades, or with sudden and devastating effects. Not every economist agrees on the reasons for slow, gradual inflation. It’s often tied to factors like market demand or the availability of certain goods and services.

Inflation in action

A current example is the inflated price of backyard swimming pools, pool filters, and pool maintenance supplies. With COVID-19 precautions closing many local swimming pools, more people than ever decided to put up backyard pools this summer. This increase in demand forced the price of pools and supplies up; another factor was the scarcity of some pool supplies since they have traditionally been manufactured in countries that slowed or shut down production due to COVID. The combination of increased demand with a short supply led to a deep inflation in the cost of these goods.

Hyperinflation

There’s more to the story, however. When both the cost of goods goes up, and the value of the local fiat goes down, it’s often referred to as “hyper-inflation,” especially when both happen in a short time frame. Unlike standard inflation, which experts aren’t always able to attribute directly to a source, economists tend to agree on the cause of hyperinflation.

The most common cause is a sudden and excessive growth of a country’s money supply. How does this happen? The Fed usually plays a role in making more money available in a strangled economy. Additionally, it’s not uncommon for governments to step in and tinker with interest rates or offer economic cash infusions (stimulus payments) in an attempt to stop the financial bleed that frequently happens with long periods of hyperinflation. Unfortunately, the bandaids for hyperinflation can often make problems worse.

How can you know if we’re in a period of inflation or hyper-inflation?

While the Fed aims for a rate of 2–3% per year inflation, this isn’t always manageable. Venezuela, for example, has seen inflation rates of 200,000% in a single year, an obvious sign of hyperinflation. It doesn’t have to be that severe to be counted, however; experts define anything above a 50% annual inflation rate to be a form of hyperinflation.

What is deflation?

The exact opposite of inflation, deflation, is the decrease in the cost of goods and services. It is usually accompanied by an increase in the value of the fiat. While some see this as a pleasant situation, deflation can be difficult for lenders who rely on climbing interest rates to make money on the cash they lend. Too much deflation or inflation can hurt essential industries. It can also harm consumer confidence over time, as people can get used to seeing prices go lower and actually hold on to their money waiting for the absolute best price. This can further aggravate the deflation cycle, something we saw during the Recession of 2008.

Remember, the role of government, unemployment, natural disasters, and technological advances can impact the cost of products we buy. Further, in the U.S., inflation doesn’t always happen across the board; consumer categories such as food and housing may see inflation over time, while items like electronics or clothing may see deflation during the same period. While consumers can’t always do much to affect inflation or deflation, we can better prepare our investment portfolios to secure our individual economic futures.

SALT Announces the Recipient of the 2020 SALT Opportunity Scholarship & Internship

SALT is proud to announce De’Alsha Diamond as the recipient of the 2020 SALT Opportunity Scholarship & Internship.

“The program is part of our commitment to diversity and is intended to provide educational and work experience opportunities while helping remove financial barriers for those that have been underrepresented in the STEM fields and FinTech industry,”said Debra Johnston, Chief People Officer at SALT. “ We are excited to be a part of the next steps in De’Alsha’s journey and to continue working toward the long-term goal of building a more diverse and inclusive workforce.”

De’Alsha Diamond graduated from Montbello High School in Denver with a 4.0 GPA and has since obtained certificates in Web & Graphic Design and Healthcare Patient Services from the Community College of Aurora. She recently worked in Quality Assurance at Ibotta and is also a graduate of the Professional Development program through CrossPurpose, a non-profit organization focused on abolishing relational, economic, and spiritual poverty through career and community development.

As the recipient of SALT’s scholarship, De’Alsha, as of September 21, 2020, is attending a Software Engineering course through General Assembly, a leading global technology education organization providing robust training in mobile and software engineering, data science, product management, and other digital-related skills. The Software Engineering course is a 12-week, full-time program designed to transform students from novices to job-ready, full-stack software engineers. Following the successful completion of the course, De’Alsha will have the opportunity to partake in a 12-week paid, part-time internship at SALT where she will be able to apply her knowledge and work alongside our software engineers.

Participation in the SALT Opportunity Scholarship & Internship program will enable De’Alsha to expand her coding abilities and gain related work experience that will help her pursue a career in software engineering.

“Diversity in the workplace is essential for so many reasons, primarily because of all of the different perspectives that come with it,” said Brandon West, Product Director at SALT. “I think most people struggle to understand what other people go through and they naturally see the world through their own eyes. When you start to diversify your workforce, you start to understand the world differently — you begin to think about different personas and users of your products and rather than problem solving and engineering for the same type of person, you begin to do that for everybody. That’s the value that diversity adds to a company.”

A CBDC Crash Course: Can sovereign-focused digital currencies become a monetary reality?

By Rob Odell

Article originally published on ValueWalk

China’s central banking system officially launched large-scale testing of what could be the world’s first digital sovereign currency. The People’s Bank of China, the nation’s central bank, is working with main banks in major cities, with a focus on digitizing the renminbi. During this trial, users register their mobile phone numbers for access to digital wallets. Through that access, they can use digital currency, issued by the central bank, to withdraw and transfer money, and to pay bills.

If this test is successful, it means that China could be one of the first countries to develop and maintain central banking digital currency, or CBDC. But China’s move toward CBDC doesn’t necessarily mean that other countries’ central banking systems will, or can, automatically follow. Moving an economy from bills and coins — whether physical or virtual — to 100% digitization isn’t something a country just does. Furthermore, there is the question of whether central banks can — or should — work directly with consumers and businesses, in direct competition with commercial and investment banks.

As such, the CBDC reality is a few years away.

Defining Digital Currency And Central Banks

Mention the words “digital currency” and the first thought that might come to mind is Bitcoin.

Certainly, Bitcoin, Ether, Litecoin, and other cryptocurrencies are digitized value exchanges, which can be used to buy goods and services. But cryptocurrencies and central banking digital currencies are two very different sides of the digital coin. While cryptocurrencies are privately developed and distributed, CBDCs are government-backed sovereign currency systems, complete with appropriate denominations. In other words, think digitized fiat currency, overseen by the central banks.

Much like cryptocurrencies, however, CBDCs are recorded on digital ledgers, which keep track of ownership and transactions by users with ledger accounts. But unlike cryptocurrencies, these ledgers would be overseen by central banks, which would also issue the currencies and process transactions.

Speaking of central banks, these institutions have big-picture monetary goals for the nations in which they operate. The above-mentioned People’s Bank of China, as well as the U.S. Federal Reserve, Bank of England, Deutsche Bundesbank, and others are responsible for national monetary policies. They also deal with the nation’s commercial and investment banks, as lenders of last resort. They aren’t in business to work with consumers or businesses.

Just because central banking systems don’t work on the commercial level, it doesn’t mean they haven’t. In writing for the National Bureau of Economic Research (NBER), economists Michael Bordo and Andrew Levin pointed out that central banks’ histories are filled with examples of interactions with consumers and businesses, and “often, these activities were considered more important for the central banks than the conduct of monetary policy, both in terms of daily operations and the priorities of top management.”

For example, the Bank of England conducted general business and consumer banking activities during the 17th and 18th centuries. And, in the United States, a highly successful post office savings bank system operated from 1911 through 1967, using the post office network to offer government-backed deposit accounts and other financial services. In many cases, postal banking performed central banking functions — such as funding two world wars — before the Federal Reserve stepped in to determine national monetary policy.

Digital Sovereign Currency Structure: The Theory…

Researchers and scholars have been pondering the idea of centralized digital currencies for a few years. The most recent study along these lines was released in June 2020 by the Federal Reserve of Philadelphia, and entitled “Central Banking Digital Currency: Central Banking for All?” Led by University of Pennsylvania economist, Jesús Fernández-Villaverde, the authors explored whether a central bank, such as the U.S. Federal Reserve, could successfully implement a 100% digital sovereign currency structure, which could realistically compete with commercial financial institutions without too much disruption.

The authors determined that, in theory, and absent any kind of financial panic, a digital conduit between central banks and consumers might be effective in optimizing fund allocations. Furthermore, a direct-to-consumer sovereign digital currency could help streamline and potentially eliminate current time-consuming and costly payment systems.

Bardon and Levin also suggest that central banking systems could offer digital currencies to the general public through specially designated accounts, opened in partnership with commercial banks. The banks could keep corresponding amounts of commercial funds in segregated reserve accounts at the central banks. Furthermore, setting up a CBDC infrastructure would be a straightforward process. Thanks to the internet, brick-and-mortar branches wouldn’t be necessary.

So, in theory, a CBDC is workable.

Now, The Reality…

China is pushing ahead to set up the first bona fide, workable CBDC. Meanwhile, other central banking systems, including the Bank of England, Bank of Japan and the Swiss National Bank, are working with the Bank for International Settlements (BIS) on additional CBDC research.

But the BIS cautions that jumping on the CBDC bandwagon right now will mean bumps in the road, mostly in the forms of security, convenience and accessibility. The current coins-and-bills banking system has sophisticated infrastructures in place to handle peak demands for money, and can support potential bank runs. Then, there are the questions about privacy and potential data breaches. Take for example, a situation in which the Federal Reserve issues $1 million to an individual’s stablecoin address. That individual then spends $100 from the same address at an online retailer.

Right now, with the way most blockchain technology functions, that retailer can look at that stablecoin address and see without question that there is nearly $1 million in the account. Cryptocurrency proves that while blockchain technology is great for anonymity, it is far from private. We must find a way to bring the same level of privacy to CBDCs as we currently experience with traditional banking, so that it is both private and public in all of the right ways. Until then, CBDC will likely remain more of a futuristic vision than become a reality.

And, from a larger-picture perspective, Fernández-Villaverde and his colleagues caution that the move to CBDCs could give central banking systems monopoly power, siphoning business away from commercial banks. Commercial and investment banks are set up to support maturity transformation — in other words, using consumer and business deposits for longer-term loans, such as mortgages. Central banks don’t have the capacity to do this; such a lack could be dangerous to economic policies.

Keeping It Cash … For Now

Though the Chinese central bank is experimenting with sovereign-backed digital currency and centralized ledgers, the CBDC concept isn’t close to implementation. Even China is phasing in CBDC very slowly. Coins and bills will be with us for a while longer, at least until security, accessibility and privacy issues — not to mention potential monopolization scenarios — can be worked out.

Still, the increasing use of cryptocurrency continues to prove that digital mediums of exchange are workable. As the People’s Bank of China continues working with sovereign-backed digital exchanges, other central banks will likely examine their own regulatory, legal and technical risks to determine the feasibility of CBDCs.

The Role of Federal Reserve: What It Can and Can’t Do

From business closures to event cancellations and stay-at-home orders, the coronavirus pandemic has had its way with the United States. Millions are unemployed, and millions of small businesses struggle to stay afloat in the punishing economic downturn.

The Federal Reserve, or “the Fed,” has been making headlines as it tries to limit the pandemic’s economic damage, including by lending $2.3 trillion that the government called for in its relief package, dubbed the CARES Act. This action has left many Americans wondering where the Fed got so much money, what the Federal Reserve can and can’t do, and what power the Fed has over our nation’s economy.

What Is the Federal Reserve, anyway?

It’s essential to define what the Fed is to understand its role in our economy. The Federal Reserve is America’s central banking system. Before the Federal Reserve, people panicked their bank would fail when a neighboring one closed its doors. Hordes of customers would run to withdraw their money, ultimately causing those banks to go belly up, too.

After a particularly terrible panic in 1907, Congress stepped in to create the Federal Reserve in 1913 through the Federal Reserve Act. The initial goal was to avoid these bank runs and provide banks with emergency funding. But today, the Federal Reserve System takes other measures to ensure the health and stability of the economy and a secure banking system.

How does the federal reserve work?

The Federal Reserve Act created a decentralized bank that functions without government financing or approval but still protects both public and private interests as a mixed organization.

It has three key entities:

1. Board of Governors

At the heart of the Fed is the Board of Governors, made up of seven officials appointed by the government and confirmed by the Senate. It acts as an independent federal agency, and its job is to direct the monetary policy — the money supply and interest rates. Its goal is to make sure we maintain a stable economy.

2. Reserve Banks

There are 12 Federal Reserve Banks spread throughout the U.S., each one having nine directors. Six directors are elected by commercial banks and three by the Board of Governors, protecting interests from both parties.

Reserve Banks are structured similarly to private corporations. They oversee member banks and carry out the monetary policy in their region. Reserve Banks act independently, but the Board of Governors supervises their actions.

These banks also have other vital roles like distributing currency to other banks, placing money into circulation, acting as a bank and fiscal agent for the U.S. government, and providing critical information about their local, national, and international economies to the Federal Open Market Committee.

3. Federal Open Market Committee (FOMC):

The FOMC is a committee comprising the Board of Governors, the Federal Reserve Bank of New York President, and four members from the other 11 Reserve Banks, who serve for one-year terms.

The FOMC’s primary role is to determine whether the Federal Reserve should buy or sell government bonds, known as Open Market Operations (OMO), to maintain the economy’s stability. It also establishes a target federal funds rate, which is the interest rate banks charge one another for overnight loans.

Where does the Federal Reserve fit into the government?

The role of the Federal Reserve within the government can seem confusing since it has public and private aspects. The Fed is accountable both to Congress and the public and maintains transparency in all its operations.

Ultimately, the Fed is a product of the government because it was created by an act of Congress, which still oversees the whole system and can amend the Federal Reserve Act at any time.

But Congress created the Fed to work autonomously and to be shielded from political pressures by using a privatized structure for the Reserve Banks. It also keeps a hands-off approach by letting the three entities carry out their core responsibilities independently of the federal government.

Can anyone override Federal Reserve decisions?

There isn’t a formal legal power that can supersede the Fed’s monetary policy decisions. Still, the Federal Reserve Act allows the Treasury to “supervise and control” the Fed where jurisdictions overlap.

But the Treasury hasn’t needed to do this because a system of checks and balances keeps the Fed’s operations transparent and answerable to the public and Congress. Just because the Fed can influence the economy, doesn’t mean it doesn’t have to follow the rules.

Independent public accounting firms audit Reserve Banks annually. The Board of Governors also gets audited by its Office of Inspector General and an outside auditor. The Board of Governors annually publishes the results on its website.

The House of Representatives and the Senate hold the Fed accountable by requiring it to report twice a year on its monetary policy and economic decisions. Fed officials also deliver speeches throughout the year to the public so that everyone understands the reasoning for its decisions and actions.

Does the Federal Reserve print money?

If you’re a Bitcoiner, or you spend a decent amount of time on Twitter, you’ve most likely seen the “money printer go brrrr” meme that went viral in March of this year. It cropped up in response to the Fed’s announcement on March 12, 2020, that it would offer $1.5 trillion in short-term loans to banks to help combat “unusual disruptions” in financial markets as a result of the coronavirus. The meme, while more of a social commentary than an accurate depiction of the Fed’s responsibilities, expresses frustration regarding the government’s role in inflation and the devaluation of the US Dollar — as evidenced by the meme’s numerous likes and shares, many Americans share this same sense of frustration. While the meme is accurate in many ways, it unintentionally brings to light the common misconception that the Fed prints money. In reality, printing money is the responsibility of the U.S. Treasury. The Bureau of Engraving and Printing prints paper currency, while the U.S. Mint makes coins. The Treasury oversees both offices.

While it doesn’t print money in the literal sense, the Fed does buy cash as needed from the Bureau at cost to put into circulation, but the monetary base in circulation and at central banks typically stays the same.

The Fed manages the money supply by creating and destroying money. It swaps old, ragged bills for fresh ones or adds and deducts from digital balances. But it also manipulates the amount of money in circulation. The FOMC decides on whether to add or remove cash from the economy by buying or selling government bonds and other securities. This influences the amount banks will lend out and keep on deposit, which then affects interest rates.

That being said, where the misconception holds some truth is in the way the Fed puts more money into circulation; the Fed can’t print money, but it does have the power to essentially create money out of thin air. As a banker’s bank, it does so by making “large asset purchases on the open market and adding newly created electronic dollars to the reserves of banks.” In exchange, the Fed receives large amounts of bonds including US Treasury securities, mortgage‐​backed securities, corporate debt and other assets. Rather than paying for these bonds in cash or gold bars, the Fed instead credits the account of the bank selling the bonds so that digital money moves from one place into the other.

The process is like taking out a personal loan of $10,000 at the bank. The bank doesn’t give you a suitcase full of cash. What you get is a credit that shows up as some numbers on a screen, reflecting your new account balance.

Because the Fed operates digitally, it can create money with a few keystrokes and use it to purchase assets or lend money. On a televised interview with “60 Minutes,” Former Fed Chairman Ben Bernanke said, “To lend to a bank, we simply use the computer to mark up the size of the account they have with the Fed. So it’s much more akin, although not exactly the same . . . to printing money, than it is to borrowing.”

The Fed did this when it promised to lend Americans $2.3 trillion, as called for in the CARES Act for economic relief and stability across the nation for those who were struggling because of the pandemic.

What can the Federal Reserve do or not do?

If the Fed can make money but not print it, what other actions is it able to take or is prohibited from taking?

What can the Federal Reserve do?

The Fed is an emergency lender for banks in financial distress, so it can lend money to failing banks to keep them afloat. But the Fed’s core responsibility is to manage the money supply, which has far-reaching effects on regulating the financial market.

It’s permitted to use four main tricks to change the amount of money in the economy:

1. Changing the reserve requirement

The Fed dictates what percent of deposits banks have to keep on hold. It usually ranges from zero to 10 percent and is currently set at zero because of COVID-19. The more banks have to keep on reserve, the less there is to go out into the market.

2. Changing interest rates on reserves

The Fed pays commercial banks interest rates on their required and excess reserves, a rule that went into effect in 2008. When the Federal Reserve wants to speed up the economy, it lowers the interest rate so that banks have less of an incentive to hold on to money.

3. Changing the discount rate

The Fed encourages and discourages banks from borrowing money from it by raising or lowering its lending interest rates. When the discount rate is low, banks borrow more to lend to each other and the public.

4. Conducting open market operations

The FOMC decides how many bonds to buy or sell. When it wants more money in the market, it buys these bonds from banks to put more money into their account. When it wants to slow down the economy, it sells the bonds to take away bank money.

This is the Fed’s most common tactic to influence the economy. For example, from 2008 to 2009, it bought over a trillion dollars of government bonds to inject money into the stumbling financial market. This lowered interest rates on short-term loans to almost zero percent.

But the recession went too deep. So, the Fed did something it hadn’t done before. It started buying long-term assets from banks in a process that’s known as quantitative easing (QE), boosting the money supply further and stimulating lending and investment.

What can’t the Federal Reserve do?

The Fed can only indirectly influence the nation’s economy. This means it does not have the power to take any of the following actions:

Set the federal funds rate

The federal funds rate is the amount of interest banks charge to lend their excess cash reserves overnight to each other. Banks frequently do this to meet the Fed’s reserve requirement.

While the Fed can’t set this number directly, the FOMC sets a target federal funds rate depending on what direction it wants the economy to go. Then, it works within what it’s permitted to do to influence banks and reach the benchmark rate.

Set the prime rate

Banks use the prime interest rate for commercial and consumer borrowing for things like credit cards and personal, car, and home equity loans. Banks often set the prime rate based on the Fed’s target federal funds rate.

Hike up mortgage and student loan rates

Mortgages and student loans are long-term assets whose rates are determined more by market-driven factors than FOMC decisions.

That said, the Fed purchased mortgage-backed securities to lower long-term rates on mortgages in 2008 so that banks wouldn’t need to borrow from each other to meet the reserve requirement. But these actions still affect federal funds rates significantly more than mortgage and student loan interest rates.

Use taxpayer money to fund its operations

The Fed doesn’t get any funding from taxpayers because its money comes from interest accruals on government securities and treasuries purchased through its OMO. There are other sources, too, such as foreign currency investments. After paying its expenses, the Fed turns any extra money over to the U.S. Treasury because it’s not operated for profit.

What’s the potential impact of the Federal Reserve’s powers on the economy?

Although the Fed can only work behind the scenes to stabilize the economy, it exerts a massive influence on its operations.

For example, the Fed can speed up or ease the economy by manipulating the money supply to increase or decrease consumer spending. It starts by influencing bank lending rates through selling and buying government bonds.

When banks have more excess reserves, there’s more to lend to the public, so interest rates are lower. Lower interest rates encourage people to borrow money, which is then spent on goods and services. More consumer spending generally means a better economy, while “even a small downturn in consumer spending damages the economy” and can even lead to a recession. Below is how the Fed’s actions impact specific aspects of the economy.

Interest rates

The Fed uses a trickle-down effect to influence interest rates. Remember, they can’t set federal funds or prime interest rates, but they can bend them to their will through OMO.

The Fed buying back government bonds from banks leaves more money for banks to play with while selling them means banks have to be more cautious about lending out their reserves. The economics of supply and demand shows excess cash in the market will drive down the interest rates banks charge to each other and the public, while a lack of money has the opposite effect.

The Fed also raises or lowers the discount rate and reserve requirements to change the interest rates commercial banks ultimately offer customers.

Inflation and deflation

When federal funds rates drop because of the Fed’s actions, prime rates usually drop with them. Consumers then borrow money for business and personal purposes to take advantage of lower interest rates. With greater amounts of money in their pockets, people spend more on goods and services, creating a spike in demand.

The larger demand pushes wages and costs higher to meet the production necessary to keep up with supply, causing a ripple effect. Prices increase across sectors, leading to reduced purchasing power. This is inflation and explains why a dollar today is worth less than a dollar last year.

Some annual inflation is good. It’s a sign the economy is doing well because consumers are spending. The Fed has a target core inflation rate of two percent. When inflation goes above or below the benchmark amount, the Fed steps in and works within its limits to move the needle toward inflation or deflation.

International relations

Although directing the U.S. monetary policy for the nation’s economic benefit is a crucial part of the Fed’s job, it also has foreign concerns.

Financial crises within our borders often have a global impact. The 2008 recession strained international markets because many countries have at least some assets and liabilities dominated by the dollar, causing them to sometimes borrow and lend in dollars.

To address the dollar scarcity, the Fed started swapping currencies with foreign economies in dire need of U.S. currency — over 583 billion dollars’ worth — at a predictable and fixed rate to keep struggling foreign banks afloat and prevent their economies from plummeting.

Sometimes the Fed also works with foreign central banks to set new banking regulations, as it did after the Great Recession.

Private bonds

As the pandemic continues to threaten the nation’s physical and financial health, the Fed is getting creative with its strategies, as it did in 2008 when it began buying long-term assets from banks.

Historically, the Fed has only purchased government securities. This time it’s buying 250 billion dollars’ worth of corporate bonds through exchange-traded funds (ETFs) to keep business up and running and workers employed. While this is good news in the short term, the long-term effects of this unprecedented move on the economy are uncertain.

The Federal Reserve: A system of the People, by the People, and for the People?

The Federal Reserve’s power and influence over our economy leaves many asking if it’s an unconstitutional entity. Though Congress takes a laissez-faire approach to the Federal Reserve, the system teeters between public and private domains.

The effect of its present monetary policy decisions on the future economy could determine which direction future reform sways. It could also decide if the century-old institution modernizes into a structure more accurately reflecting the concerns and voice of the people, and one maintaining greater transparency while ensuring the long-term economic stability of the nation.

How to Protect Yourself Against Phishing and SIM Swapping Attacks

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As cybercriminals are becoming more sophisticated, their attacks are becoming increasingly challenging to defend against. Two of today’s most concerning types of cyberattacks for cryptoasset owners are phishing and SIM swapping. Phishing accounts for 90% of all social engineering incidents and 81% of all cyber-espionage types of attacks, while SIM swapping, although less common, can cause equally devastating effects. Cryptocurrency holders in particular, are attractive to black hat hackers and are uniquely vulnerable to phishing and SIM swapping attacks — here’s what you need to know to protect yourself.

Protecting against phishing attacks

Phishing is a socially-engineered cyberattack that is primarily used to obtain sensitive information including as usernames, passwords, bank/credit card details, or public and private keys to cryptocurrency wallets. The vast majority of phishing is done through email but it can also come through texts/SMS, social media, and chat services. Disguised as a trusted entity, the perpetrator tricks you into opening a message containing a malicious link or attachment. The links will typically then lead you to copycat sites resembling webpages of banks, payment processors, or online crypto-wallets. These sites are designed to trick you into entering your usernames and passwords.

There are also phishing scams that specifically target cryptocurrency holders. In most instances, the attackers masquerade as some of the more popular online wallet services (e.g. Blockchain.info or Coinbase) and prompt you to give up your credentials. In other scams, emails may include seemingly relevant attachments containing malware that infects your device and stealthily scans its files, searching for private keys to a cryptocurrency wallet.

As a general rule of thumb, if you get an email you weren’t expecting, and if something — anything smells “phishy,” disregard it entirely. Additionally:

  • Consider anything that comes into your spam folder a red flag
  • Be aware of email spoofing, which is when an attacker makes an email look like it came from a legitimate sender. For example, an email can look like it came from whitehouse.gov but it will likely (not always) go into spam since the address is spoofed.
  • Attackers can also make look-alike domains using a Cyrillic character that looks identical but isn’t. Those may show up in your inbox (not spam).
  • Always check the authenticity of any URLs included in the email and beware of URL redirects.
  • Avoid reacting impulsively to any calls to action (downloading attachment files or replying with any sensitive information). Keep in mind that phishing attacks are designed to make you feel a sense of urgency to respond.

Preventing SIM swapping

SIM swapping is a type of account takeover attack whereby the perpetrator breaks the two-factor authentication (2FA) security protocol by hijacking your telephone number. The attack usually starts with social engineering; scammers gather your personal details (e.g. full name, address, phone number) and call your mobile phone provider pretending to be you. Using various social engineering techniques, they then convince the wireless carrier employee to port your phone number to the attacker’s subscriber identification module (SIM).

After they’ve successfully hijacked your phone number, usually just by asking for a password reset, the attackers can break into any of your accounts — email, bank/online wallet account, and others that require a call or SMS 2FA. If your phone suddenly becomes unable to make or receive calls, you may be a victim of a SIM swapping attack and should take immediate action.

To avoid becoming another SIM swapping statistic, refrain from using your phone number with 2FA where the second factor is a call or SMS-enabled authentication. In fact, if you can, avoid giving your phone number to your email or other service providers entirely. Authentication apps like Google Authenticator or Authy are a much safer alternative, as they’re tied to your physical device instead of your phone number.

If you must provide a phone number to access a specific service, contact your cell phone provider about extra layers of security for preventing number porting. Some carriers provide additional layers of security. Also, make your standard pin something random and store that pin in a secure place like a password keeper.

Safeguard your crypto assets and personal information

Ownership over cryptoassets is established solely through digital signatures (public and private keys). Couple that with the irreversible nature of blockchain transactions and you get a potential recipe for disaster. If an attacker gets ahold of your keys or your recovery phrase, whether that’s through tricking you into abdicating them yourself (phishing) or by forcefully porting your phone number and breaking the 2FA of your online wallet (SIM swapping), the result will always be the same: your funds will be lost forever.

For these reasons, taking the precautionary steps to protect your accounts, your online identity, and, ultimately, your cryptocurrency holdings, is worth the extra effort.

Halve you heard? Your Guide to Bitcoin Halving Events

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While the world’s fiat currencies suffer from inflation as governments print more money to manage the COVID-19 crisis, Bitcoin, by design, is becoming more deflationary with each block confirmation. This is because Bitcoin creator Satoshi Nakamoto intended for Bitcoin to be the antithesis of government-controlled fiat currencies: “The root problem with conventional currency is all the trust that’s required to make it work,” wrote Satoshi in a post on the P2P Foundation Forum, “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” In the post, dated February 11, 2009, Satoshi announces the creation of Bitcoin (along with a link to the earlier published white paper) and details its characteristics that make it anything but conventional. Among these characteristics is the fact that “everything is based on crypto proof instead of trust.”

In creating Bitcoin as a decentralized, trustless system, Satoshi ensured that it could not fall victim to the “breaches of trust” and inflation experienced throughout the history of fiat currencies. Unlike fiat currencies that are controlled and manipulated by governments and central authorities, Bitcoin follows a strict set of rules that have been embedded into its codebase or “monetary policy” since its inception. These rules include a hard supply limit of 21 million coins, the last of which will be mined around the year 2140. Currently, more than 87 percent of the 21 million bitcoin have been mined, meaning there are approximately 3 million remaining coins to be mined over the course of the next 120 years. The speed at which new bitcoin is mined and distributed is controlled by 30 precoded “halving” or “halvening” events (our Twitter followers prefer “halving”, so we’ll go with that from now on) that will take place every 210,000 blocks or about every four years until the last bitcoin is mined. In 2008 the block reward for miners was 50 newly minted bitcoin for each validated block. Following the first halving event in 2012, the block reward reduced by 50 percent to 25 bitcoin per validated block and then reduced by another 50 percent to 12.5 bitcoin following the second halving event in 2016. 2020 marks the year for the third halving event in which the block reward will be reduced to 6.25 bitcoin per validated block.

While we don’t know the exact date of the halving event (more on this below), we know it is fast approaching and is set to occur sometime this month. There’s been a lot of anticipatory chatter about the halving as people question and speculate on how it will (or will not) impact everything from the price of bitcoin to profitability and participation of miners in the network.

We’ve compiled what we consider to be the best available resources for understanding the Bitcoin 2020 Halving event and answering some of the most common questions around it.

When will the halving occur?

The answer to this question is contingent on the speed at which new blocks are created. Given the average block time is around 10 minutes and a halving event takes place every 210,000 blocks, the halving is estimated to occur on or around May 11. While there are various countdown resources that estimate within a day of one another, our favorites are the Bitcoin Halving Countdown from CoinMarketCap and the Bitcoin Clock, which “uses data from BTC.com to get the average block time for the past two months. It then uses this block time (currently 10.3125 minutes between blocks as of March 25, 2020) to estimate the halving date.”

Tell me more about the halving. What is it exactly? What is the intention behind it?

Whether you’re new to crypto or you’ve been in the game for years, we can all use a bit of a refresher when it comes to the halving event. If you’re new to crypto, we recommend starting with this video from We Use Coins regarding the need for Bitcoin and this video from CryptoCasey, which provides a straightforward explanation of blockchain technology, mining, and the upcoming bitcoin halving event. For a more humorous take on the benefits of “the currency of the future,” check out this video from Cameralla Comedy.

Running short on time? Try this episode of the 4-Minute Crypto Show, which offers a speedy, yet thorough explanation of halving events.

If you’re already familiar with the crypto basics and want more detail on the halving, this article from CoinDesk is an excellent resource. Not only does it include an illustrative explainer video that breaks down and simplifies the process, but the article also dives into:

  • the economic reasoning behind Satoshi’s decision to build the halving events into Bitcoin’s code

For additional info on previous halving events and miners’ roles in the network, Michael Sweeney from The Block provides a solid explanation in his analysis, “The bitcoin halving: what it is and why it matters.”

Interested in learning more about the economics behind Bitcoin’s monetary policy? Take a look at this article from The Block’s Mike Orcutt or this guide from Block Geeks that provides a crash course on supply and demand, inflation, deflation, and market cap as it relates to bitcoin, as well as how incentivization for miners fits into the equation. Or if you really want to get into it, Bitcoin Magazine’s Peter C. Earle explains why the 2020 halving is particularly important. He calls out the difference between the old and modern definitions of inflation, noting that in the context of the modern definition which refers to “an increase in general price levels within an economy,” the fact that “with increasing value one bitcoin buys more over time, it is indisputably deflationary.”

“What’s noteworthy about this point, Earle writes, “is that, upon this particular halving, Bitcoin ‘inflating’ at a roughly 1.8 percent rate annually will nominally — and by then, quite possibly in real terms — be ‘inflating’ at a rate lower than both the Federal Reserve target of 2 percent per year and current, CPI-based estimates of real U.S. inflation of 1.9 percent annually.”

Tell me more about the miners. How will it impact who is currently mining and who will continue to profit? Will the halving result in mining eventually becoming monopolized?

Andreas Antonopoulos tackles these questions in this short video clip and notes that we don’t need to be concerned about the monopolization of mining because the amount of profit a miner generates is not contingent on the size of their mining facility but on the smoothness of their mining operation. So while there are multiple factors that play into whether a mining operation is profitable, larger operations do not necessarily have an advantage over smaller ones. Rather, it’s all about efficiency. “Halving will increase competition in mining,” he says, and in general it will be the least efficient miners that become less profitable.

Similarly, in an interview with Anthony Pompliano the CEO of Blockware Solutions Matt D’Souza states, “The efficient miner should not fear the halving, they should welcome it.” Why? D’Souza notes that “once we go through halving the miners’ revenue is going to get slashed in half” and we’re going to experience what he considers to be “a healthy cleanse of the network.” He predicts that if the bitcoin price is still at $8k or lower going into the halving, we may experience “extreme miner capitulation” where we may see up to 40 percent of the network shutting off due to high energy costs and reliance on outdated mining equipment. He notes that as these inefficient miners begin to pull out of the network following the halving, there will be an adjustment period from May to July as the network undergoes these changes. At that point, difficulty will kick in and margins will improve for those miners who are still in the game. “Mining is about survivability,” says D’Souza, “You just need to survive. If you survive, difficulty will adjust in the future and it’s going to improve your margins because the people that are inefficient… their bitcoin is going to go to you.”

What happens to miners once all of the bitcoin has been mined and there are no more block rewards?

After the final halving event takes place and the 21 millionth bitcoin is mined sometime in 2140 miners will no longer receive block rewards, but they will still collect transaction fees just as they do currently. While we don’t know for sure how miners will react once we reach this point, according to Adam Barone in his article published on Investopedia, “Even when the last bitcoin has been produced, miners will likely continue to actively and competitively participate and validate new transactions. The reason is that every bitcoin transaction has a small transaction fee attached to it. These fees, while today representing a few hundred dollars per block, could potentially rise to many thousands of dollars or more per block as the number of transactions on the blockchain grows and as the price of a bitcoin rises. Ultimately, it will function like a closed economy where transaction fees are assessed much like taxes.”

What about the bitcoin price? How will it be impacted by the halving event?

The short answer is that there is no shortage of predictions.*

To quote Antonopoulos regarding his thoughts on price predictions: “I think it’s mostly irresponsible to make predictions about price. It’s the same as astrology and reading tea leaves.” While we agree with him on this sentiment, many people in the cryptosphere have openly made predictions about what will happen to the price of bitcoin following the 2020 halving. So, if you’re one for speculation or you just find it fun to read about people’s theories and want to be aware of what some of the most well-known people in the industry are saying, here are a few links for you to check out:

How can I watch the halving event?

For the previous halvings, it was fairly common for people to throw watch parties to celebrate the halving event. Now with current social distancing measures in place, in-person parties are being replaced by live streams. Our pick for how to watch and celebrate the 2020 Halving is Bitcoin Magazine’s 21-hour Live Stream for which they’ll be sharing updates across their social channels regarding exact timing, but you can track their countdown here.

*This content is meant to educate and inform but should not be taken as financial or investment advice. Trading and investing in cryptocurrencies (also called digital or virtual currencies, cryptoassets, altcoins and so on) involves substantial risk of loss and is not suitable for every investor.

What to Expect When the Value of Your Collateral is on the Decline

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Your collateral is what protects your loan. It’s why SALT doesn’t need to perform income checks or credit checks when issuing a loan. But cryptocurrencies are volatile, so what happens if the value of your collateral begins to fall? Declining collateral value negatively impacts your Loan-to Value-Ratio (LTV) — that is the amount of outstanding principal still owed on your loan divided by the value of your underlying collateral: Outstanding Principal / Value of Collateral. LTV is the key metric SALT uses to determine the health of a loan. The lower the LTV, the healthier the loan. If the value of your collateral goes up, your LTV goes down. If the value of your collateral goes down, your LTV goes up. It’s that simple.

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Choosing your Loan-to-Value (LTV)

When choosing your LTV, the most important consideration is your risk tolerance. We offer starting LTV options of 30%, 40%, 50%, 60%, and 70%. If you go with a 30% LTV, you are choosing the safest level of overcollateralization, or cushion. With a 70% LTV, you won’t have to deposit as much crypto to begin with, but you’ll have the least amount of cushion. The higher the starting LTV, the higher the risk. Choose the LTV option that’s right for you.

What can you expect from us when your collateral declines in value and your LTV begins to rise? Lots of notifications.

If your collateral continues to go down in value, your LTV will steadily climb. As your LTV crosses certain critical thresholds (75%, 83%, 88%, and 90.91% as of the time of this writing) SALT’s robust monitoring and notification technology kicks in to help protect your loan.

  • At 75%, we give you a heads up, letting you know to monitor your loan more closely given your collateral is declining in value.
  • At 83%, we inform you that things are not looking so good, and you may want to consider paying back some of the loan or depositing extra collateral.
  • At 88%, we issue a final warning to let you know that if you don’t pay back some of the loan or deposit more collateral, you run a high risk of having your assets liquidated.
  • At 90.91%, SALT is contractually obligated to liquidate a portion of your collateral in order to prevent the lender from losing their investment.

After all, lenders wouldn’t be willing to lend the money in the first place if SALT couldn’t guarantee its safety.

How you respond to a rising LTV and warning notifications is up to you. Here are the current options:

  1. Pay back a portion of the loan — You can make a payment in USD via wire or ACH, or you can make a payment using a stablecoin instead. SALT currently accepts PAX, USDC and TUSD. With this option, you are choosing to lower your LTV by paying down the principal on your loan.
  2. Deposit more collateral — You can quickly and easily deposit additional collateral (it can be the same collateral your loan is backed by or a different collateral type that we offer). With this option, you are choosing to lower your LTV by increasing the total value of the underlying collateral.
  3. Do nothing — You can choose to ignore the warnings. If your collateral continues to decline in value, SALT may eventually be forced to liquidate a portion of your assets on the open market.

We’ve done the math to show you how each of these options impacts your assets, remaining principal, and required payment.

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Based on the above calculations, if you want to avoid any loss of assets, it’s best to respond as quickly as possible with options one or two. Otherwise, option three is available if that’s what you prefer. Either way it’s important to think through the options and know where you stand before your LTV crosses our liquidation threshold.

Keep tabs on your loan health from anywhere via the real-time LTV widget on your web dashboard or by logging into your account through our mobile app.

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It’s on us to monitor your loan health and keep you updated. It’s on you to take action (or not take action) when your collateral value is on the decline.

Considerations for Filing Taxes as a Crypto Holder in 2020

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Disclaimer: This article is for informational and educational purposes only and does not constitute tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors when filing your taxes.

While the tax deadline has been extended from April 15, 2020 to July 15, 2020 due to the COVID-19 crisis, it’s still a good idea to file as soon as possible, especially for those taxpayers who are expecting a refund. For crypto holders, it’s important to note that for the first time ever, this year every tax-paying American will be getting quizzed explicitly on their crypto activity. Indeed, the 2020 season will mark the first time the following question appears right at the top of the 1040 tax form:

“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

This year however, federal tax forms ask about your bitcoin and other cryptocurrency activities, the latest move to more directly specify details for cryptocurrencies. The IRS is focusing on those who may be underreporting their crypto transactions or not reporting them at all.

What does this new sentence in your tax form this year really mean, and how should it impact how you report crypto in your 2019 taxes? To help understand, we asked SALT experts, along with our partners and friends at Node40TaxBitBlox and Friedman LLP.

Know Your Cost Basis

The first thing to know is that one is taxed on profit — the key figure to find out is the gain number. The most recent set of guidance from the IRS was released in October 2019 and it included a few methods of “cost basis assignment” mentioned therein. For those who aren’t accountants, this means one of a few ways to track profits and losses. Know your cost basis and what the IRS deems taxable. Most importantly, know your “gain number.”

Cost basis means the price at which you initially acquired an asset. For example, if you hold one BTC today, which you previously purchased at $9,000, and the price today is $11,000, the cost basis is that acquisition price of $9,000. So, the unrealized gain number (without selling) and the realized gain number (if you were to sell) is the net between today’s price and the cost basis, meaning in this case $2,000.

Cost basis can also mean the fair market value of the asset on the date of acquisition. For example, you received one BTC from work as compensation for services on 1/1. The value of BTC on 1/1 is $9,000. Later when you sell one BTC at $11,000, the then fair market value of $9,000 would be the cost basis, and you would realize $2,000 gain. The fair market value can be determined using a reasonable method, such us prices on any third-party independent trading platforms, as long as the same method is applied consistently for all your crypto transactions.

Loan collateral does not count as a transaction

For SALT customers, it’s important to know that your crypto held as collateral for a cash or stablecoin loan does not count as a taxable transaction unless your collateral is liquidated; a liquidation is a taxable event. If your collateral increases in value during the course of your loan term, this does not count as a gain or taxable action unless the collateral is sold. According to Friedman LLP, should you have a business loan with SALT, take note that business interest is deductible and subject to limitations (generally 30% of adjusted taxable income if the business had more than $25 million gross receipts). While interest on personal loans is generally not deductible, it may be deductible if you are self-employed and you use the loan for your own business or if you are employed but you use the loan to make other investments that generate income (the loan then becomes a business loan or investment loan).

First-In-First-Out (FIFO)

First-In-First-Out (FIFO) is the default accounting method. Your cost (the price at which you purchase a crypto asset) is calculated at the initial purchase date. So, if you buy a Bitcoin in January, another in March, and sell one in June, the “cost” isn’t from March, but January. The first “in” is the first purchasing transaction. First “out” is the first one sold. With digital currency the date of purchase and sale are clear in the coins and tokens themselves, making reporting much easier.

The aforementioned guidance from the IRS clarifies how to calculate your gain number.

By way of example: assume you purchase one BTC on 1/1 for $10,000, one BTC on 2/1 for $15,000, and then sell one BTC on 3/1 for $12,500 — your taxable gain or loss using first-in-first-out is computed by taking $12,500 of proceeds less your cost basis of $10,000 (which comes from the earliest purchase of BTC). This results in a $2,500 taxable gain.

While FIFO is the default method, the IRS makes it clear that the Specific Identification method can also be used if a taxpayer can document unique digital identifiers such as a private or public key. The acceptance of specific identification is favorable for taxpayers, as it allows taxpayers to assign their highest cost basis lots first, which in return minimizes their tax liability.

More details on this specific topic can be found over at Taxbit’s blog here.

Be Careful Using 1099s from Exchanges

If you have been buying crypto through exchanges, the exchange may have sent you a 1099-K or 1099-B form. Even if you did not receive these documents, all the 1099 methods of calculating income are still valid for you. The exchange calculates and reports gross proceeds, meaning that it is on the taxpayer to provide information on the cost they paid to acquire said assets and reported in the capital gains section, otherwise known as IRS 8949.

Specifically, form 1099-K reports gross proceeds, which the IRS interprets as income. The number reported on form 1099-K is not counted as income however, as cryptocurrency trading carries cost basis and is to be reported in the capital gains and losses section of a taxpayer’s tax return. Form 1099-B reports cost basis when available and makes it easier for you as a taxpayer to complete your required IRS 8949. Some cryptocurrency exchanges may not send you anything at all. Regardless of which form you receive or don’t receive, your responsibility as a taxpayer is to use the information to complete your IRS 8949, which reports your capital gains and losses.

Verify the Data You Receive

The crypto industry is still relatively new and while the exchanges and trading technology may have some advanced reporting features built in, the institutions built around that technology are still new. With traditional securities, there is a clearinghouse, a broker, and well-established financial statements that make it easy to determine your taxes. With cryptocurrency, many of the exchanges are still in the process of refining external reporting standards. This means that, as a user, the level of completeness in reporting expected from NYSE cannot possibly be replicated by virtually any new institutions.

According to data by NODE40, the reports generated by cryptocurrency exchanges will be incorrect for about 80% of cryptocurrency traders. We can’t fault the exchanges because there is simply no way for them to determine the cost basis of the assets you’ve been moving around. For this reason, it’s important to consider using a third-party platform that can calculate the gains and losses on your cryptocurrency as you move it from exchange to exchange or wallet to wallet.

Conclusion: Educating Ourselves is Essential

Crypto accounting and tax reporting can be daunting and complex, which is why staying engaged with news and trends is essential to understanding the evolving landscape of crypto taxation. Especially in the U.S, the IRS is taking more steps to introduce greater guidance and clarity. But without proper education and trained professionals, navigating crypto tax can be tough.

Tax preparers and investors rely on 1099 forms in traditional markets — crypto is no different. Without it, the burden of responsibility shifts to the investor, requiring them to keep track of all of their crypto activity for the year. This includes tracking every crypto-related transaction, like fair market value based on the date of purchase or sale of assets.

All of this information is vital for preparers to determine cost basis and properly calculate gains and losses. Therein lies the primary challenge. Some crypto accounting and management platforms have emerged to solve this growing industry need for smarter solutions. Industry giants need reliable, accurate and smart tools.

Because crypto remains a new field and exchanges are widespread around the world, not all exchanges report in the same method. This is why the savvy users will double check the work of the exchange, a task for which there are now new tools available. These errors can have a massive tax impact, particularly when it comes to tracking the cost of acquisition of the asset over time. Luckily there are tools that exist that can provide traders and crypto entrepreneurs with intelligent support.

Taxes are a part of life. This year hundreds of millions of Americans will be reminded explicitly of the existence of digital assets — a good thing for the industry that will drive greater awareness and adoption of cryptoassets. If you’re already a crypto hodler or trader, diligence is key to successfully filing your 2019 taxes this year. Whether you use a third-party tool or rely solely on exchanges to track the movement of your assets, it’s crucial that you know your gain number and verify its accuracy, that you review the IRS guidelines, and that you use trusted sources to educate yourself on what to report and how to go about it.

Safety through multi-signatures

Our community has voiced an interest in better understanding how we use multi-sig for our transactions and we wanted to pull back the curtain a bit to share how SALT prioritizes the security of crypto assets. So how does SALT execute on best-in-class security when it comes to crypto transactions? By building and leveraging a team with expertise in cyber security, accounting, and IT architecture.

To start with, what is multi-sig? Multi-signature (multi-sig) refers to the requirement that more than one key is present to authorize an action. The concept applies to physical or digital keys and has been around far longer than crypto.

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While the Bitcoin protocol inherently has built-in multi-sig capabilities that can be easily seen on the chain, Ethereum does not expressly define how multi-sig should be implemented. Ethereum implements multi-sig through smart contracts designed by individual parties. In SALT’s opinion, these remain largely untested and need to accumulate a history of safety, prior to adoption. Our Ethereum transactions are not based on a multi-sig contract, but on a multi-sig process and technology internally.

How does this happen?

When the ETH key is created it is sharded into M of N parts, using a mathematical process that allows it to be rebuilt, and the original key is thrown away. This results in functional multi-signature, even though it is not a multi-sig address like Bitcoin.

Then when a transaction is requested, it goes through several rounds of digital and physical security checkpoints.

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First the transaction must be initiated by a member on the SALT platform, or by our team internally. The transaction is then verified, reviewed, and ultimately approved by our accounting team. After the verification, a team of rotating signers place their keys (or key parts in the case of Ethereum) into a “digital safe” while a facilitator oversees the transaction. This group of signers changes with each transaction for added security. Given the key is broken up into an M of N series of sharded keys-parts, each separately encrypted, none of the participants will ever be able to see even a portion of a full key. Cryptocurrency kept within the SALT platform can never be moved by any one individual.

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Think of the process as a house with a physical safe inside. That safe requires several physical keys to open, and for the homeowner to be present for any access to the money to be permitted. Similarly, our process requires a number of key-holders, the digital safe itself, and then a facilitator (homeowner), all to execute the move.

At SALT, we ensure security through process and technology to provide security in all of our transactions.

Loan to Value (LTV) Explained

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When you apply for a traditional loan, the lender uses your credit score, as reported by third-party credit agencies, to determine your credit worthiness or financial “reputation.” The higher your credit score, the lower the risk. To offset your credit score or in some cases even completely remove it from the equation, you can apply for an asset-backed loan. With this type of loan, you can offer up your assets — anything from your house or car to your stock portfolio — as collateral to act as “insurance” for the lender. In asset-backed lending, borrowers typically secure loans for an amount that’s less than the total value of the collateral.

The measurement of the balance of the loan relative to the value of the collateral asset is represented as loan-to-value or LTV. For example, you may have a loan for $320,000 for a home that is valued at $400,000, in which case your loan is 80% of the total value of the home.

As an asset-backed lender, one of the things that makes SALT unique is that we don’t even look at your credit score. With a SALT loan when you have collateral — whether you’re unbanked, haven’t accumulated credit, or have poor credit — you can still get a loan. Instead, SALT uses loan-to-value of your collateral to assign risk. As LTV is a measure of risk, the lower the LTV, the lower the risk for the lender (and therefore the lower the interest rate for the borrower).

How is LTV calculated?

Good question.

LTV is calculated as the loan amount in USD divided by the value of the collateral in USD, expressed as a percentage.

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As an example, if you have a current loan balance of $100,000 and your total collateral asset balance is $200,000, you have an LTV of 50%. To make things easier, we’ve added an LTV Helper to the borrower portal that illustrates exactly how the LTV is calculated. See below.

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Understanding LTV and how it’s calculated is essential to making an informed decision about your loan terms. Liquidation events benefit no one, which is why we provide the tools like our automated notification system to help you avoid them. Before you apply for a loan, you should ask yourself:

  • How much do I need?
  • How much total crypto do I have?
  • Am I prepared to deposit more crypto if necessary to lower my LTV?

Once you answer these questions, you can choose the LTV that’s right for you.

Starting LTV

When you are taking out a loan against your crypto assets with SALT, you presently have 3 options for your starting LTV; 30%, 40% and 50%. The starting LTV will determine approximately how much (in terms of dollars) of the crypto asset you will need for that loan.

From the example above, for a $100,000 loan, you would need $200,000 in Bitcoin, Ether, Doge, or Litecoin to secure the 50% LTV loan option. For a 40% LTV, it would be $250,000 and for 30% LTV, it would be approximately $333,333.

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Using LTV as a measure of risk, the 30% LTV option is the lowest risk.

Why is a lower LTV seen as less risk?

As the LTV goes up, the value of the underlying asset goes down. In the case of a crypto asset-backed loan, the value of Bitcoin, Ether, Litecoin, or Doge is trending down.

If the price of the crypto asset falls too low, the LTV will continue to increase. As it approaches 100%, there is a threshold where the collateralized asset will be sold to pay back the loan. This is known as the liquidation threshold. This threshold can vary from business to business and loan to loan.

For our example, let’s say the liquidation threshold is set to a 90% LTV.

When the LTV ratio reaches 90%, the crypto asset will be sold to reduce the LTV back down.

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Timeout. Liquidations!?!

At SALT, we pride ourselves in having a robust notification system that relays important account activity to borrowers via our portal, text, phone calls, and emails. We give you control of how you want to be notified about each activity. You can be notified of everything from deposits and withdrawals to LTV warning thresholds.

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As a borrower, you always have the option to transfer more collateral at any time.

Back to LTVs.

Why does this matter?

As you might be aware, the price of Bitcoin (or any crypto asset) can move up and down. As the price moves up, your LTV goes down. As the price moves down, your LTV goes up.

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To build on our earlier example of a $100,000 loan with a 50% LTV, let’s use Bitcoin as the underlying crypto asset. In this example, let’s use $4,000 as the US dollar price of 1 Bitcoin.

Loan Amount = $100,000

Starting LTV = 50%

Price of 1 Bitcoin = $4,000

Doing the math $200,000/$4,000, you would need approximately 50.00 BTC to get a $100,000 loan with a 50% starting LTV.

Bringing it all together!

From above, assuming the liquidation threshold is set at 90% LTV, the price of 1 Bitcoin would need to go all the way down to approximately $2,222 to raise the LTV up to the liquidation threshold of 90% LTV.

A $100,000 loan with a starting LTV of 40%, would require 62.50 BTC at a price of $4,000 per Bitcoin. However, the 90% liquidation threshold would not be reached until the price of 1 Bitcoin went down to approximately $1,778.

Repeating the example with a 30% LTV, you would need 83.33 BTC at a price of $4,000 per Bitcoin and would reach the 90% liquidation threshold when the price of 1 Bitcoin was approximately $1,333.

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The first card powered by your crypto,
not your credit score.

The first card powered by your crypto,
not your credit score.

Three SALT credit cards floating