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:

• 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.

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.

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’s 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 investment 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: $100,000
• Loan term: 12 months
• Initial LTV (Loan-to-Value): 50%
• Annual Percentage Rate (APR): 13%
• Interest accrual: Daily
• Loan type: Payment at maturity
• Collateral required: An amount of bitcoin valued at $200,000

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.

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. 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.

Benefits of bitcoin-backed loans:

• Access cash, without selling: Maintain ownership benefits and exposure to future price appreciation.
• Avoid taxable events from selling: Borrowing against your bitcoin avoids triggering immediate capital gains or losses, unlike selling your bitcoin
• No credit checks: Loan approval is based solely on your bitcoin collateral, 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 market-leading rates. Learn more here.