What are bitcoin-backed loans?
Bitcoin as collateral to unlock cash liquidity
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 maintaining benefits of ownership, including maintaining their position for long-term price appreciation.
Bitcoin offers several advantages over traditional types of collateral:
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.
The aforementioned advantages simply can’t be accessed when using legacy forms of collateral. 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.
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’s the basics:
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 investment could be at risk, which is why certain LTV thresholds are preset to trigger margin calls or liquidations:
To show how this works, here’s an example of a bitcoin-backed loan:
In this example, you begin by posting an amount of bitcoin worth $200,000 and receiving $100,000 in cash (50% LTV). During the loan, you monitor and manage your LTV, ensuring sufficient collateral to avoid margin calls during any significant bitcoin price drops. You can do this by either adding more bitcoin collateral or by making cash payments to reduce the loan’s outstanding principal.
After one year of interest accruing, you repay $113,000 ($100,000 principal, plus 13% interest) and your bitcoin is returned to you.
Established bitcoiners know that bitcoin is a peer to peer electronic cash with a strictly limited supply and growing worldwide adoption. History has shown that time in the market beats timing the market, since many of bitcoin’s biggest price gains happen on a small number of days and no one knows when they will be. 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, invest, 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.
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 market-leading rates. Learn more here.
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