Bitcoin Loans: The Comeback of the Century or Just Another Fad?

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On the 16th of January, in a move that could only be described as a delightful twist in the tale, Coinbase decided to dust off its Bitcoin-backed loan service, allowing our dear American friends to borrow USDC (that’s USD Coin, for those not in the know) using their Bitcoin (BTC) as collateral. Quite the financial jiggery-pokery, wouldn’t you say? 💰

Now, this loan service is a curious concoction of CeFi and DeFi, a bit like mixing gin with tonic but with a dash of existential dread. Coinbase takes your BTC, wraps it up in a shiny new package called cbBTC, and sends it off to Morpho, a DeFi protocol that manages the loan terms and interest rates with all the grace of a cat on a hot tin roof.

While the idea of Bitcoin-backed loans isn’t exactly fresh off the press—having been around since 2017, mind you—this latest escapade might just be a sign that the market is waking up from its slumber, much like a bear emerging from hibernation, albeit with a slight hangover.

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Interest in Bitcoin and crypto-backed loans seems to be making a grand return. According to the august HTF Market Intelligence, the Bitcoin loan market is currently valued at a staggering $8.6 billion, with projections suggesting it could balloon to a jaw-dropping $45.6 billion by 2030. Talk about a financial growth spurt! 📈

Now, putting one’s Bitcoin to work can be a clever ruse, but let’s not forget the lurking specter of risk (ahem, Celsius, anyone?). Some investors might see the arrival of traditional finance institutions as a beacon of hope, suggesting that Bitcoin-backed loans could be a tad more secure in the future. Take Cantor Fitzgerald, for instance, a New York financial firm that has dipped its toes into Tether and launched a Bitcoin lending program in November 2024. Quite the ambitious lot, aren’t they?

After the repeal of the infamous SAB 121 accounting rule on January 23, publicly traded banks can now start developing their own Bitcoin-backed loan services. It’s like opening the floodgates to a financial water park, complete with all the thrills and spills!

Buy, Borrow, Die

Bitcoin-backed loans allow users to unlock the trapped liquidity of their BTC holdings without the need to sell their precious coins, thus avoiding the dreaded taxable events. A veritable tax evasion strategy, if you will! 😏

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Bitcoin investor Mark Harvey has noted that these loans give investors the option to implement the so-called “buy, borrow, die” strategy. According to his rather optimistic calculations, by posting 1 BTC as collateral at a conservative 10% loan-to-value ratio, an investor could pocket $9,784 in cash in the first year. If the investor continues to borrow against the growing value of their BTC each year—assuming a 50% annual appreciation, of course—their cash flow could swell to a staggering $164,000 over a decade. A cunning cycle designed to maximize gains while keeping taxes at bay. Bravo! 🎩

From the lender’s perspective, using Bitcoin as collateral can help reduce idiosyncratic risks. Andrew Hohns, the CEO of Newmarket Capital, told CNBC that it’s a novel lending strategy his firm has adopted. They lent money to a real estate owner who then used a portion of it to purchase Bitcoin, adding it as additional collateral. A rather clever ruse, if I do say so myself!

“By fusing Bitcoin with credit and traditionally financeable assets, it gives us the luxury of expressing that medium-term view on Bitcoin,” he mused, likely while sipping a fine sherry.

The Risks of Bitcoin-Backed Loan Services

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Currently, there are around 20 service providers allowing users to borrow stablecoins and fiat using Bitcoin as collateral. CeFi firms like Wirex, Nexo, and Bitcoin Suisse, along with DeFi protocols like Aave and Compound, are all in on the action, allowing investors to supply wrapped Bitcoin (wBTC) as collateral. Quite the bustling marketplace!

Crypto-backed loans provided by CeFi firms boomed from 2019 to 2022 before the unfortunate misuse and theft of customer funds led to the downfall of Celsius, BlockFi, and Voyager Digital. DeFi-based loans offer greater transparency but come with their own set of challenges, like smart contract vulnerabilities and a lack of regulation. It’s a bit like walking a tightrope over a pit of alligators—thrilling, but not without its perils!

While many people sing the praises of Bitcoin loan services, others remain as wary as a cat in a room full of rocking chairs.

Bitcoin investor and self-proclaimed “value maximalist” Brad Mills shared in an X post that he hasn’t touched any Bitcoin loan services, despite investing in companies that develop them. He values his Bitcoin holdings more than his equity in Bitcoin businesses. A rather principled stance, if I may say!

“[…] I won’t recommend a service I wouldn’t use personally… I didn’t take loans on BlockFi, Celsius, etc., etc., because of rehypothecation risk. When I find something that fits my BTC maximalist risk parameters, I’ll be its biggest cheerleader, whether I’m an investor or not.”

Bitcoiner @btc_overflow has also expressed his skepticism, likely while shaking his head in disbelief.

The End of the Bitcoin Lending Roadblock

Until January 23, most major banks were unable to offer Bitcoin-backed loans due to the SEC’s accounting guidance, SAB 121, which required listed companies to disclose crypto assets held on behalf of clients as liabilities on their balance sheets. A rather cumbersome affair, if you ask me!

For banks, this was a bit of a pickle, as capital requirements are tightly linked to balance sheet contents. Although both the US House and Senate voted to overturn SAB 121, former President Biden vetoed the decision, leaving the rule intact (albeit granting some exceptions to BNY Mellon). A classic case of political maneuvering!

On January 23, the SEC officially rescinded this controversial guidance, marking a significant shift and a potential opening for banks to enter the Bitcoin-backed loan market. A veritable gold rush, if you will!

Additionally, Coinbase’s legal team clarified that the FDIC was compelled to further un-redact the “pause letters” sent to banks in 2022 and 2023. In a thread on X, Nic Carter listed 25 FDIC documents requesting banks to halt various Bitcoin-related operations. Quite the bureaucratic ballet!

The recent pro-crypto turn among US legislators is likely to lead to increased Bitcoin exposure among America’s major banks. This will not only increase crypto adoption but also likely result in reduced sell pressure on Bitcoin, helping to drive its price higher. From a user and investor perspective, a larger Bitcoin loan market could lead to more competitive rates and improved loan conditions. A win-win, if ever there was one!

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2025-01-30 22:21