# Rolling-over bitcoin backed loans

Collateral appreciation compounding faster than interest accrual

Category: Money
Source: https://strike.me/learn/rolling-over-bitcoin-backed-loans/

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What happens when the compound annual growth rate of collateral outpaces a loan’s interest rate?

[Bitcoin-backed loans](https://strike.me/learn/what-are-bitcoin-backed-loans/) involve posting bitcoin as collateral and receiving a cash loan. Unlike traditional collateral, bitcoin's average compound annual growth rate (CAGR) has significantly outpaced conventional loan interest over many years. 

This dynamic introduces an interesting possibility: the ability to repay your loan by leveraging the increasing value of your bitcoin collateral through continuously refinancing.

Let’s explore.

## How bitcoin-backed loans work
When you open a bitcoin-backed loan, the [Loan-to-Value (LTV) ratio](https://strike.me/faq/what-is-my-loan-to-value-ratio) determines how much money you can borrow, relative to the value of your bitcoin collateral. A maximum initial LTV of 50% means you can borrow up to half the value of your bitcoin. For example, if you have $20,000 worth of bitcoin, you can borrow up to $10,000 in cash. Over a 12-month term with say a 13% APR, the total amount due at the end would be roughly $11,300 (depending on fees), assuming you opt for a payment at maturity-type loan. For a monthly payment-type loan, interest would be paid monthly, and the $10,000 principal would be paid at the end.

Considering bitcoin's historical trend of long-term price appreciation, the value of your bitcoin collateral could increase substantially during the loan term, outpacing the interest rate and enabling a refinancing strategy at maturity, often referred to as “rolling over.”

## Rolling over monthly-interest vs. maturity-interest loans
Depending on the type of your loan, refinancing a bitcoin-backed loan as part of a rollover strategy could work differently. 

### Monthly Payment loans:
With this structure, the loan’s interest is paid over a monthly schedule, so that at the maturity date only the principal amount is due ($10,000 in the above example):
* To roll over at maturity, you could open a new loan for the same principal amount, using the same collateral, provided you pay any remaining interest that has accrued during the final month.
* This new loan would be at the prevailing interest rate, which may be higher or lower than the original.
* As long as your collateral has sufficiently appreciated to cover the new loan’s allowable LTV ratio, your new loan would replace your previous loan.

This approach would allow you to delay principal repayment for another year, while preserving your collateralized position.

### Payment at Maturity loans:
With this structure, both principal and interest are due at the maturity date. Some lenders offer the ability to roll over both the principal and interest into a new loan, however, other lenders (including Strike) support refinancing of the principal amount only:
* To roll over at maturity, you must first pay the accrued interest before opening a new loan of the same principal amount.
* For example, a $10,000 loan at 13% APR requires $1,300 of interest to be paid at maturity to facilitate a rollover. This could be done using excess cash, selling bitcoin, or retrieving sufficient collateral from your loan to sell (assuming the loan’s LTV has capacity to support a collateral retrieval)

However, for some people accessing sufficient cash liquidity to pay down the accrued interest can be a hassle or impractical. As an alternative, you could leverage the ability to open multiple loans to avoid having to source additional cash. Here’s how:
1. Prior to maturity, retrieve a portion of your loan’s bitcoin collateral.
2. Use that collateral to open a *new* loan (Loan #2) of sufficient size.
3. Use the cash from Loan #2 to pay the accrued interest on Loan #1.
4. Refinance Loan #1’s principal amount for another year.

This results in **two concurrent loans**, but maintains the original position without requiring any additional capital. 

After another year, assuming your bitcoin collateral has appreciated sufficiently relative to the loans’ APRs, you could repeat the process by withdrawing collateral from one or both active loans to open a third loan. The cash proceeds from this third loan could then be used to cover the accrued interest on the earlier loans—and potentially repay the entirety of the second loan—enabling you to consolidate and maintain just two active loans for simplicity.

So long as bitcoin’s price rises to outpace the prevailing APR and maintain a sufficiently low LTV, you could repeat this process by continuously reusing appreciated collateral to fund interest payments by opening new loans.

### The benefits and implications
* **Deferred repayment:** Rolling over allows deferral of principal repayment for multiple years. This lets you keep the loan’s proceeds deployed for your desired purpose for longer.
* **Potential de-risking:** If bitcoin appreciates faster than the interest rate, your collateral base can expand relative to the borrowed principal. Over time, your position’s LTV ratio would become lower, reducing the risk of margin calls or liquidations
* **Strategic optionality:** If collateral appreciates significantly, users may optionally pay down loans, take out larger loans, or retrieve collateral for other purposes.

## Understanding the risks and assumptions of rollovers
Of course there are risks associated with refinancing loans as part of a rollover strategy. The above examples rely on multiple key assumptions:
1. Consistent bitcoin price appreciation
2. Stable lending rates
3. Continuous rollover availability

In reality, these assumptions are not guaranteed and require individual evaluation:

### Bitcoin price appreciation: 
Bitcoin’s price is volatile, and its sharp drawdowns can significantly affect your Loan-to-Value (LTV) ratio, potentially triggering margin calls or forced liquidations. However, over the long term bitcoin’s price performance has seen substantial growth. Between January 1, 2015, and December 31, 2024, Bitcoin's compound annual growth rate (CAGR) has exceeded 57%, rising from ~$315 to over ~$93,000, far surpassing traditional benchmarks. Although such performance isn’t guaranteed moving forward, it provides the perspective that bitcoin’s multi-year CAGR has consistently outpaced interest costs in traditional loan structures.

This growth, while not uniform year-over-year, reflects increasing adoption by individuals, corporations, and countries. As broader understanding of Bitcoin's monetary properties deepens, further adoption could fuel additional demand, supporting higher prices over time.

### Interest rates: 
Interest in the bitcoin-backed lending market is influenced by a range of macroeconomic factors, including:
* The availability of capital willing to lend against bitcoin
* The perceived risk and volatility of bitcoin as collateral
* Competitive pressures among lenders
* Broader monetary policy trends

A stable interest environment isn’t guaranteed. If capital providers grow cautious or liquidity tightens, rates could rise, increasing refinancing costs. Conversely, as more lenders recognize bitcoin’s value as a desirable form of collateral, capital may become more accessible—lowering rates through competition and improved market confidence.

Importantly, the cost of capital is deeply linked to global economic policy. For example, in response to a recession, central banks may lower rates or increase the money supply through quantitative easing. These actions can:
* Devalue fiat currencies, fueling price inflation, including for assets like bitcoin
* Increase investor interest in scarce, non-sovereign assets like bitcoin
* Encourage capital providers to seek yield in alternative markets—including bitcoin lending

This means economic downturns could create an environment of lower rates and higher bitcoin prices, potentially benefiting rollover strategies.

### Rollover availability: 
The ability to execute a rollover strategy hinges on continued access to willing lenders and liquidity. This in turn depends on:
* Market maturity and lender confidence
* Growth of institutional and retail demand for bitcoin-backed loans
* Technological platforms enabling seamless rollover options
* Regulatory clarity and risk management standards

The evolving educational landscape around Bitcoin also plays a pivotal role. As more capital providers understand bitcoin’s unique qualities—fixed supply, decentralized architecture, censorship resistance—they may increasingly offer lending services backed by it. This deepening ecosystem can expand options for borrowers, improve terms, and reduce rollover risk.

## Mitigating risks
When considering bitcoin-backed loans or rolling over your loan, it’s important to mitigate against risks associated with price volatility, unpredictable rates, or rollover availability:
* **Over-collateralize:** Posting more bitcoin than the initial LTV requirement creates a larger buffer against price declines, helping to avoid margin calls or liquidations.
* **Strategic use of proceeds:** Deploying the borrowed funds in a way that generates returns can help offset or exceed the loan's interest, improving your ability to repay.
* **Avoid over-leveraging:** Refraining from pledging your entire bitcoin holdings as collateral reduces your personal risk and maintains a reserve for adding collateral in case of sharp or prolonged price declines.

Rolling over bitcoin-backed loans offers a way to leverage bitcoin's unique growth characteristics. However, a thorough understanding of market dynamics and a proactive approach to risk management are essential for navigating this strategy successfully.

From Strike's Learn library — https://strike.me/learn/