Bitcoin-backed loans let you unlock cash liquidity, without selling your bitcoin.

Bitcoin-backed loans are a way to use your bitcoin as collateral – a valuable asset that serves as a secure guarantee to get a cash loan. These loans help bitcoin holders access liquidity while keeping their exposure to bitcoin’s price over the long term.

Bitcoin offers several advantages over traditional types of collateral:

  • High liquidity and fast settlement: Bitcoin’s 24/7 global trading and the speed of the Lightning Network or on-chain transfers enable quick conversion to cash and efficient settlement.
  • Transparent and verifiable ownership: Bitcoin transactions and ownership are recorded on its public blockchain, ensuring transparency and ease of verification.
  • Global scalability and programmability: Bitcoin’s divisibility, programmability, and global nature enable loans of any size, from micro to macro, and facilitate flexible collateral management.

Bitcoin represents an entirely new kind of collateral, free from the inherent constraints of legacy financial systems. Compared to traditional collateral assets like real estate, stock portfolios, or personal property, bitcoin offers compelling advantages that make it a valuable alternative for both borrowers and lenders.

Legacy forms of collateral can’t match these advantages together. Real estate suffers from illiquidity, appraisal requirements, and local market conditions, whereas stock portfolios are bound by trading hours and settlement delays.

Bitcoin as collateral opens a new world of possibilities for lending and financial markets.

How do bitcoin-backed loans work?

Bitcoin-backed loans function just like any other collateralized loans – you pledge an asset as a secure guarantee to borrow cash and then upon repayment of the loan, your collateral is returned to you.

Here are the basics:

  1. Post bitcoin as collateral: You transfer your bitcoin to a lender who holds it as security, ensuring that they can recover their funds in case you default.
  2. Receive cash: The lender provides you with a cash loan, to be repaid within a designated time period and interest rate.
  3. Repay the loan: Over the loan’s term, you make payments (or a lump sum at maturity) to repay the loan’s principal amount plus interest.
  4. Return of your bitcoin: Once the loan is fully repaid, your bitcoin is returned to you.

The loan size and required collateral are determined by the Loan-to-Value (LTV) ratio – the loan amount compared to the collateral’s value. For example, an LTV of 50% means you can borrow up to 50% of your collateral’s value. Due to bitcoin’s price volatility, the value of the collateral fluctuates, directly impacting the LTV ratio. If the collateral value were to fall significantly, the lender’s funds could be at risk, which is why certain LTV thresholds are preset to trigger margin calls or liquidations:

  • Margin call: If the LTV rises to a certain threshold, a margin call is triggered, requiring you to add collateral or repay part of the loan within a certain timeframe.
  • Liquidation: Failure to resolve a margin call or a critically high LTV ratio can cause an immediate collateral liquidation to recover the lender’s funds.

Example of a bitcoin-backed loan:

To show how this works, here’s an example of a bitcoin-backed loan:

  • Loan amount: $10,000
  • Loan term: 12 months
  • Annual Percentage Rate (APR): 11.25%, fixed for the 12-month term
  • Interest accrual: Daily
  • Loan type: Payment at maturity
  • Initial LTV (Loan-to-Value): 50% (inclusive of principal and interest)
  • Margin call threshold: 70% LTV
  • Collateral required: An amount of bitcoin worth at least $22,250

In this example, you’re borrowing $10,000 at a fixed 11.25% APR over 12 months, with a total repayment obligation of $11,125 due at maturity.

Because the initial 50% LTV includes both the loan principal and interest, you’ll need to post bitcoin collateral worth at least $22,250 (twice the total repayment amount). You can post more if you wish to over-collateralize and reduce the risk of a margin call or liquidation.

Throughout the loan term, it’s important to monitor your LTV. If the price of bitcoin falls, the value of your collateral drops—increasing your LTV. If your LTV reaches 70%, a margin call is triggered, requiring additional collateral or partial repayment to bring your LTV back down.

At the end of the 12-month term, you repay $11,125. Once the repayment is complete, your full bitcoin collateral is returned to you.

Why should you consider a bitcoin-backed loan?

Established bitcoiners know that bitcoin is a peer-to-peer electronic cash with a strictly limited supply and growing worldwide adoption. Because of this, a popular strategy is simply to hold your bitcoin, and not sell.

This presents a problem – how do you enjoy your wealth if you never sell? How do you buy a home or car, support friends and family, start a business, or even take a vacation if your wealth is tied up in bitcoin, which you don’t want to sell?

Bitcoin-backed loans can offer a solution, giving you cash liquidity to use now, while keeping your bitcoin exposure for the long term.

Benefits of bitcoin-backed loans:

  • Access cash, without selling: Keep your exposure to bitcoin’s price.
  • Avoid taxable events from selling: Opening a loan generally isn’t a taxable event, unlike selling your bitcoin. Liquidations and payments made with bitcoin are taxable events.
  • No credit checks: Eligibility is based on your bitcoin collateral and location, not your credit score.
  • Fast and efficient: No need for lengthy approval processes or property appraisals, as funds can be delivered and accessed quickly.

Risks of bitcoin-backed loans:

  • Lender risk: Opening a loan means you temporarily give up direct control of your bitcoin, trusting the lender or third parties to return it when the loan concludes.
  • Price volatility risk: If bitcoin’s price drops significantly, your LTV increases, which can trigger margin calls or liquidations – forced sales at inopportune times.
  • Interest costs: If your use of the loan proceeds doesn’t generate enough return to cover the interest costs, then you won’t benefit financially.

Because bitcoin is more volatile than traditional collateral like real estate, it’s crucial to know the risks and monitor your LTV to avoid forced liquidations.

Strike offers bitcoin-backed loans with no origination, prepayment, or liquidation fees. Learn more here.