When you talk to Bill Barhydt about his days at Netscape, you can’t help but feel that he’s reliving that excitement today — with cryptocurrencies. He’s the founder and CEO at Abra, a crypto wealth management platform that includes a brokerage, high yield investments, and a cryptocurrency lending service.
Bill joins us on the podcast to talk about the firm’s genesis story, going global, and how Abra services the needs of its consumer and institutional clients in almost 100 countries. We discuss the evolution of crypto and how the old school banking world and digital asset ecosystems are already working together. Bill shares more about the firm’s recent launch of its crypto lending service and where that product might go in the future.
Bill Barhydt is my guest today on the Tearsheet Podcast.
Before Abra, I had done a lot of work for global Internet platforms, including Netscape. I actually ran a remittance company working in developing markets. I wanted Abra to be a global banking platform based on crypto. So your question is a little loaded, because we’ve had stops and starts in terms of how we’ve gotten to the success we’ve gotten. We’re very profitable now, but it certainly was not a straight up-and-to-the-right path. To get there, I think what we’ve figured out is the order of services that we needed to offer to both consumers and institutions to gain traction quickly, and then start to scale more services on top of that as we go.
It’s funny — we’re coming around to a lot of the services that we wanted to offer in the very early days of the company around payments and money transfer. But in the very earliest days, it was around how do I get access to crypto? How do I earn yield on my crypto? How do I borrow against my crypto. It very straightforward, but hard to implement.
Our belief is that over time, Bitcoin, Ethereum, and certain other cryptocurrencies are effectively a long term appreciating asset versus the dollar. Similar to gold, but in the future, I don’t think people will be comparing it to gold because I think this will be bigger than gold. But effectively, crypto is an appreciating asset; the dollar, at the same time, is therefore a depreciating asset. The idea of Abra Borrow is that you continue to hold the appreciating assets (Bitcoin, Ethereum, or other cryptocurrencies), and you borrow in a depreciating asset, which is the dollar.
We’ve been doing this on the institutional side for quite a while. Now, we’re doing it for retail investors, as well. We’re live in 45 states in the US and adding the other five with lending licenses, and also in about 50 countries around the world. You simply stake your Bitcoin or Ethereum as collateral. And you can choose how much collateral you want to put up, and that translates into a certain interest rate that you pay for borrowing dollars. We’ll actually give you a 0% interest loan, if you are willing to put up more collateral, and give you like a 7% or 8% interest loan if you’re willing to put up like, let’s say, 50% of the crypto as collateral.
Crypto lending clients
Our customers are a mix. Some are crypto rich and want to access the gains now, but still ride the crypto upside. That solves two problems: it lets me access the gains because I’m not selling my crypto and I’m not necessarily paying any short term capital gains as a US investor. I would also say we have people who are new to this who might want a little bit of leverage. So let’s say you want to multiply your winnings by like 1.1 or 1.2. So if you get what we call a 10% LTV loan and buy more crypto with that loan, you now have effectively 1.1 exposure to Bitcoin or Ethereum.
We have venture capitalists who have used their Bitcoin as collateral to buy houses. There was this migration from San Francisco to Miami. Well, it turns out Abra financed some of that as crypto rich investors put up their Bitcoin as collateral and then borrowed against it. There are lots of use cases that are already evolving — college tuition is another one that’s evolving in real time.
Prime brokers for the wealthy have been doing this for decades. I have wealthy friends who never sell stock, but use that stock as kind of a bank account where they simply borrow against it. One friend in particular has held Apple shares for more than 10 years and never sold a single share, and basically uses that as his free cash flow mechanism by borrowing against it at very low rates via his prime broker. This is a very similar model, but now accessible to to this new crypto audience.
Go to market
We want to do this for banks eventually. The biggest problem that banks have right now is what they’re allowed to offer via their regulators. The bigger issue would be FDIC for federally chartered banks or state chartered banks or the NCUA for credit unions, which limits the kind of products that they’re allowed to offer and still maintain those insurances. And crypto generally falls into one of those products that they’re not allowed to offer today. The irony of that, of course, is is that if you look at how traditional lending works, the banks are way more leveraged in these solutions than we would be with a 50% LTV product, for example (banks only required 20% down for a mortgage). In some cases, you can get away with even less. But I do predict that, over time, banks will get permission to offer these kinds of products.
There are rules around what banks can and can’t do. You need kind of a logical separation between crypto and traditional banking. And the two don’t necessarily interoperate very well. So, for example, we work with the trust bank that custodies our crypto assets on behalf of our users. You’re actually getting a trust bank account when you use their high yield product. And those accounts would be separate from where you would store cash in the bank. They generally don’t become commingled and regulators obviously have strong incentives to preserve the existing system because it basically maintains the status quo.
Substitute or complement
There’s a multi part answer here. If you’re in a developing market, we have a lot of consumers who use Abra to send money, as well as to speculate in crypto, invest in crypto, borrow against crypto — money transfer is a much bigger use case in developing markets. Now in the US, it’s mostly speculation, the ability to generate yield, even the ability to borrow — really a true wealth management solution. I will say that in the short term, [crypto] is complementary, because the banks don’t offer the services.
In the long term in the West, I actually see it differently. I think that in my 30 years in the business since I was at Netscape, I watched almost every business on the planet be completely changed from the inside out via the internet with a couple of exceptions, and banking is one of the biggest. Now, that’s mostly due to the government granted monopoly that financial institutions get. The idea of too big to fail is just nonsense. There hasn’t been a new federally chartered bank in the United States, to my knowledge, in 15 years. So I think long term, this is the future of banking. I think this is exactly how banking is going to work, and the banks just don’t know it yet.
Hurdles to greater awareness
When we explain [our pitch] to a high net worth customer, a family office customer, in a one on one situation where it’s just like you and I talking, the aha moment happens relatively quickly. And we get very large deposits from them, and they love the service, they love the yield. There’s just 100 things that they’ll like. But obviously, we’re very early. We have a couple million customers. But still, it’s early — most people on the planet have never heard of Abra. Most people on the planet have never heard of most crypto exchanges. So there’s still a general lack of awareness of what it means to hold an appreciating asset, for example, and borrowing a depreciating asset. To own something that looks like digital gold, to act as wealth growth and a preservation mechanism.
You explain to the average retail investor, that a company like MicroStrategy is sitting on billions of dollars in Bitcoin and they look at you like you’re crazy — like, why would they want to do that? But if you can actually methodically walk them through the logic of why, it’s like, wow, that makes a lot of sense. Why isn’t everyone doing that? And so we’re still in this early phase of awareness, where it’s a lot of techies doing yield farming via these complicated DeFi smart contracts, which a lot of people have no idea what I’m talking about. That’s how early we still are. And so that’s the biggest challenge. I think we’ve killed it in terms of creating a really compelling, simple user experience that makes this very accessible and less daunting. But if you don’t know it exists, you don’t know. That’s the biggest challenge for us by far.
Value of keeping it simple
Simplicity always wins. When we didn’t know what to do in the early days, it was like, okay, what’s simpler for this group of users? And that’s what will always win. I think things are evolving in a similar way with these next generation crypto banking services, because the first generation was all for these highly complicated day trading environments where people know advanced limit orders and all this other stuff that the average investor doesn’t understand. And now we’re just making it so drop dead simple, that it’s a couple of clicks and you’re generating yield.
Without giving it all away, I would say you’ll see a lot more from us in the payment space. Getting back to our roots as a company, money transfer and developing markets. We’re rolling out support for certain products in developing markets that aren’t really required in the US. For example, we’ve deployed cash networks in the Philippines and Guatemala.
It actually works a little bit differently from remittances, where it’s just for pickup. It actually goes in both directions, meaning you can buy bitcoin for cash, but you can also sell it for cash, which can be just your investment dollars, or picking up a money transfer that was basically based in Bitcoin or Ethereum or a stable coin, for that matter. And that’s a requirement that we don’t have obviously in the US, but it’s doing a huge, significant percentage of our business in these countries. We’ve launched it in the Philippines, we’ve launched it in Guatemala. Last week, we started testing it in El Salvador, which has been in the press a lot lately because of their adoption of Bitcoin via legislation. And so I predict we’ll see more and more of these cash on ramps and off ramps in a lot more countries as we go to develop a truly global solution. Whereas in the US, everybody’s fine with the bank on ramps and off ramps.
I spend a lot of time on product features. I spend a lot of time on awareness programs. Now I spend a lot of time on how we scale and what we’re doing to get to 20 million users from a compliance perspective. Meaning, how are the regulations going to evolve in all of these countries that we operate in? And are we out in front of that? I have to spend a lot of time in each of these topics. We have some really cool things working out, for example, on the marketing front — Q4 is going to be really fun from a product perspective for us. So it’s just these moving parts happening at the same time when you’re scaling a business that’s scaling faster than Netscape. Did you know a lot of companies in the crypto space are scaling much faster than the. com companies of the 90s?