This is a contributing article by Yiwei Wang from Babel Finance.
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It was based on mutual respect and shared ambition at the very beginning, when Flex Yang and Del Wang, founders of Babel Finance, decided to make an impact in the world of cryptocurrency. While they may not agree on everything in life, but one goal has always united them: to build a financial service firm matching the excellence and reach as JP Morgan in the crypto finance world.
A quiet evening with dozens of fireworks dancing in the night sky, Spring Festival of 2018 in China was a chilly moment many unexpected. The bitcoin price reached unprecedently high at around 20,000 USD three months before, many expecting it to fall and the crazy bubble of ICOs was on the verge of the bust. Confusions and anxiety spread like wildfire in the market, but Flex and Del were among the few to remain committed to their belief and goal.
The downward trend continued for the rest of 2018 as the cryptocurrency slid even further in the second half-year of 2018. Decided not to miss the next golden era, Flex and Del eventually started their business in August 2018. But the stress and difficulties were apparent. Working intolerable long hours and facing high uncertainties made the birth of Babel Finance challenging. Besides, the cryptocurrency lending business was not looking promising and less ready when the market was shrinking along with the bitcoin price drop to a low as of 6,000 USD. As a result, more and more people chose to panic and decided to exit the business.
It was the unwavering belief in bitcoin and outstanding hard work that allowed Flex and Del managed to survive in 2018. Leaving from their headquarter in Hong KoOng, they went on tour around China to meet the cryptocurrency miners in remote cities from Southwest China to Northeast China and trying to communicate to miners Babel’s business model. Education takes many forms: from dinner tables drinking spirit to singing songs in Karaoke together with miners. The ultimate goal was to promote Babel’s brand awareness and trust in its business model.
All the efforts have paid and eventually, Flex and Del established friendships with miners and some of them started to borrow cash in stable coins like USDT from Babel Finance and use it for their business operation. After Q2 2019 when the bitcoin price recovered from low 4,000 USD and skyrocketed to 7,000 USD, miners who borrowed from Babel Finance enjoyed sweet asset gain on their bitcoins. The trust was firmly built between Babel and its first-generation customers.
It was then when miners were convinced that borrowing is not bad and could be good for them in the long run. Then Babel Finance slowly gain reputation among miners in China and the business started to grow gradually.
“We are just trying to implant from traditional banking what can be done in crypto finance world. There is secret of Babel’s fast growth, think smart and work hard.”
Land of Crypto Opportunity
China’s unique status in the ecosystem manifests in a way that is both obvious and opaque. On the one hand, it has the largest number of miners spreading across the nation. Miners are essential to the maintenance of the bitcoin network and there are two important factors that influence their operation. First is the cost of capital. The machines that run tests and solve math problems in order to gain bitcoin evolved at a fast rate. The need for a faster and more efficient way of solving math problems constantly drives the innovation of machines. Starting from CPU, which used Satoshi’s platform, then to GPU, FPGA, and finally to application-specific integrated circuit (ASIC). ASIC is the most popular and efficient available. It is specifically designed to mine bitcoin and its cooling power was improved by 100 times.
Aside from the innovation in the bitcoin mining machine, another important factor to keep in mind is the cost of electricity. In a research it was found that China has a competitive advantage with the supply of cheap electricity. In relatively poorer regions such as Sichuan, Far South West regions, the price of electricity is much cheaper, especially during the rainy season. Chinese miners, who account for 70% of the total miners around the world, benefiting greatly from using cheap electricity from those regions.
Flex and Del were among the first one to noticednotice this disparity of the bitcoin market that the west need bitcoin from China while miners need cash to run business. They acted quickly and contacted some crypto lending institutions from the west and established business relationship with them so that Babel Finance could have access to very cheap cash in USDT. These cheap capital greatly helped Babel Finance to gain advantages then competitor on the lending market among miners in China. Flex often claims that Babel Finance is the bridge between the east miners and west capital.
Today Babel Finance claims to be one of the largest cryptocurrency finance service providers with its outstanding loan reaching USD 380 Million at the end of Q1 2020.
It is expanding its crypto asset management service as well to meet the rising demand from high-net-worth individuals that are desperate to diversify their assets allocation to hedge the risk from flooding of money printing by central banks around the world.
It even launched Babel PRIVATE as its flagship privilege service brand by borrowing the private banking model from the traditional banking industry to satisfy these high-end clients. It is also one of the biggest traders of the fast-growing cryptocurrency derivative.
“We are just trying to implant from traditional banking what can be done in the crypto finance world. There is a secret of Babel’s fast growth, think smart and work hard,” said Flex Yang, Founder and CEO of Babel Finance, and he has big expectations for the future.
“It’s just a beginning and not bigger enough. Thinking about that when the BTC price rise to USD 100,000, our loan value will become over USD 3 Billion even if we don’t expand more. But for sure we will continue grow.”
Évolutionnaire rencontre Extraordinaire
Graduated from Hong Kong City University and in 2012 joined PwC, Flex worked in the office of IFC and audited the world’s largest insurance companies such as Allianz. Life could be like many of his classmates in the financial hub city of Hong Kong. But Flex want more than that.
In 2015 he Flex quit PwC and founded his own startup Standard Financial Inclusion which aimed to provide credit loan service to SMEs using IPC and inclusive financial approach. Given his strong credibility, the startup was backed by funding from renowned VCs including Sagamore and Lightspeed. The future looked promising and Flex was determined to win.
The other partner er of Babel Finance joined with a different yet similar background. After his graduation from university, Del joined the Beijing branch of IIndustrial and Commercial Bank of China (ICBC), one of the world’s largest banks in China, where he spent over five years learning the banking business and trading commodities. In 2014 Del quit from ICBC and founded his first startup, BowenPay (波纹积分)，the first RIPPLE-based tokenized-points issuing, trading, and payment system in China, sadly closed down after about two years operation. Before meeting Flex, Del was working on his second startup Zero Fenbei (零分贝), a data service company targeting poverty alleviation and microfinancing the unbanked populations in China.
Del and Flex both are from the same province Yunnan in Southwest China and soon get close after they met in Beijing. The connection and mutual respect of each other have resulted in their latest joint endeavor- Babel Finance.
In fact, bitcoin is a reliable hedge against many uncertain events worldwide, such as geopolitics and sovereign credit crisis.
The Babel Way
Bitcoin is by far the most successful and popular cryptocurrency in the market. It is decentralized, meaning its transactions are made between users, also known as peer-to-peer networks. It does not need any third party such as banks to verify transactions. Instead, thanks to blockchain technology, bitcoin miners can earn bitcoins, by using algorithms such as Proof of Work, as a reward for maintaining and verifying each transaction.
To prevent losses on client-side, Babel Finance has from the very beginning designed a series of risk management tools to hedge the risk clients exposed to. Del and Flex invited Zhicheng Wang, a finance associate professor at Bejiing University, as advisor to help design the risk management system by using the VaR model that Wang had used in similar work for Construction Bank of China.
With their background and lessons learned from previous works at bank and auditing firms, Flex and Del always keep high alert to the risk on cryptocurrency market. The risk management tools and their risk acumen did paid in growing the business.
Take March.12th also known as the Black Friday for bitcoin as example, Babel Finance started to buying put options in as earlier as Feb 2020 while bitcoin price is high. This greatly reduced Babel’s risk exposure during the sudden crash happened on Mar 12th and gave their rooms so they can try its best at the time to recover and prevent losses of its clients by implementing risk management tools that received high praise from clients for its swift and professional judgment.
Talking about the Black Friday for bitcoin at BTC TOP roundtable, Del said, ‘this crisis is not about whether bitcoin is a safe haven asset, but a liquidity crisis. In fact, bitcoin is a reliable hedge against many uncertain events worldwide, such as geopolitics and sovereign credit crisis. The original intention of the creation of bitcoin by Nakamoto is currency, but it is not a currency at this stage more of an alternative asset. At the same time, bitcoin also has the storage of value characteristics of gold because we can see its trend with gold since March this year.
In addition to expanding the lending business, Babel Finance is entering the growing big opportunity by providing cryptocurrency asset management service to high-net-worth individual and institutional investors.
In February 2020 it launched Babel PRIVATE, a private banking-level wealth management service for the growing ultra-high-wealth individuals across China and Asia. Mr. Tong Lei（佟磊), a senior manager of the private banking business from China Merchant Bank, was hired to lead the Babel PRIVATE service at Babel. On Jun 19, the Babel PRIVATE APP was officially released online for open test. All the clients of Babel PRIVATE are invited only and must meet certain criteria on their assets value at Babel Finance.
Through Babel PRIVATE, Flex and Del not only just want clients to enjoy more professional and customized finance service with their crypto assets, but also show the great number of potential cryptocurrency investors from traditional financial world that there is high-quality and professional financial service available for them once they decided to turn from investing traditional assets to cryptocurrency.
Flex and Del have confident about that will happen soon. To better equip with Babel Finance for that, they hired Mr. Chen Xin, an veteran stock and option traders from an largest trading firms to head the trading desk at Babel Finance and help to design innovative products that will produce higher return for cryptocurrency investors. According to Del, Babel Finance now is one of the largest traders on Deribit, the world’s largest cryptocurrency derivatives trading platform.
Babel Finance has rolled out 5 different types of structured products since 2019 to meet customers’ needs and goals. All products are carefully designed by Babel Finance using an option-based portfolio. The base assets are options-based and based on the bitcoin structure fluctuation rate for return.
- Babel BTC Bullish Shark Fin: earns different ARR according to the BTC price when check-out. If during any time of the product usage, the BTC price exceeds or falls below the hook range, the product offers an extra 3% ARR on top of the principal If the BTC price falls in the hook range, then the ARR is calculated based on the check-out price.
- Babel BTC Bearish Shark Fin: earns different ARR according to the BTC price when check-out. If during any time of the product usage, the BTC price exceeds or falls below the hook range, the product offers an extra 3% ARR on top of the principal. If the BTC price falls in the hook range, then the ARR is calculated based on the check-out price.
- Babel ETH Bullish Shark Fin: earns different ARR according to the ETH price when check-out. If during any time of the product usage, the ETH price exceeds or falls below the hook range, the product offers an extra 3% ARR on top of the principal. If the ETH price falls in the hook range, then the ARR is calculated based on the check-out price.
- Babel BTC Bargain-hunting: helps users to buy in BTC at a lower-than-market desired price. If during any time of product usage, hook price is triggered, users will not pay any service fee to successfully earn equal value BTC. Otherwise, users earn back the principal plus the extra ARR.
- Babel BTC Target Profit: helps user sell BTC at a higher-than-market desired price. If during any time of product usage, hook price is triggered, users will not pay any service fee to successfully sell equal value USDT. Otherwise, users earn back the principal plus the extra ARR.
Due to the complexity of options-trading, entry-level investors often don’t understand the technicalities and seamless logic behind the concept, so it is difficult to make money on options. However, Babel Finance has completely resolved this dilemma by providing high-quality structured products with option-based portfolio embedded.
Bitcoin is based on well-designed Nash equilibrium system (dynamic game equilibrium system). When the price falls, it will lead to the decrease of computing power. The decrease of computing power will lead the difficulty of the network to be reduced. Finally, the total wealth of the miner will actually rise again, because the cost of the miner is less than before.
2021- More institutions coming
Achieving one goal after the other, Flex and Del are setting their eyes are bigger goals. As the Covid-19 continues to spread globally and the rise of populism in different parts of the world, bitcoin may not be the most ideal investment tool, but it is the best that is currently available.
Since 2018, the industry havehas seen a rise in the development of infrastructures of the crypto finance ndsutryindustry: more variety of services and products are being offered to the market. Big moments like the launch of Bakkt, release of white paper on Libra by Facebook, the Black Friday for bitcoin this year, and much discussion surrounding the future of bitcoin have inspired Flex and Del to look forward with confidence mixed with caution.
From a hectic run of 2020 and the third halving, bitcoin has undergone a vast transformation. It is developing so fast that it makes it harder for risk takers especially miners to keep up. Del has said during a roundtable event on Babel’s competitive advantage in bitcoin-related financial products. He argues that ‘leverage is not an all evil tool, because if it is used correctly and timely the return will be significantly better.’
Often cited flaws such as bitcoin miners facing tough battles ahead are misinformed according to Del. In fact, he argues that， ‘the highly leveraged miners are forced out the game might be a good and healthy systematic cleansing process. Good for bitcoin and good for the crypto ecosystem.’
The trend is obvious that the mining industry is attracting more institutions joining in 2019. Typically, these new players either have more capital or resources such as cheap electricity so that they can bear longer term of loss before recovering their investment. At the same time, they tend to have better understanding of using finance tools either to manage working capital or to hedge market fluctuation. Thus it give Babel Finance more opportunity to expanding finance service through innovative product like mining machine-backed loans.
To better serve the institutional clients, Mr. Liu Yulong, an investment bankersinvestment banker from Lazard was hired in Nov 2019 to lead Babel Finance’s global partnership. Flex and Del also expected this could help Babe Finance to expand to market out of Asia.
The outlook for 2021 of the world isn’t much clearer than what people perceive today after the COIVD-19 pandemic, however, Del believes that one thing about bitcoin is more certain than before is the value of bitcoin will be re-discovered and reappraised and it is only helping to build a common ground for a brighter future of bitcoin. As the world is going through some tough waters, bitcoin seems to have become a lighthouse in the midst of madness.