The promises of Bitcoin-backed loans for institutional portfolios | Opinion

As a seasoned analyst with a background in renewable energy and finance, I find the concept of Bitcoin-backed lending to be an intriguing fusion of traditional finance and cutting-edge technology. The parallels drawn between Bitcoin loans and mortgage financing are particularly compelling, as both strategies leverage assets believed to appreciate over time.


In the course of 2024, the concept of using Bitcoin (BTC) as security for loans is growing more prevalent. People and organizations worldwide are offering their Bitcoin to secure sizeable amounts of cash.

Consider how property investors utilize mortgages. They’ve understood for a while that leveraging an asset they expect to increase in value by borrowing against it is a shrewd strategy. Why would you sell something you believe will increase in worth if you can borrow against it instead? In terms of Bitcoin loans and real estate mortgage financing, both types of loans are based on the assumption that these assets will grow in value over time—why sell something you think is increasing in value when you can borrow against it instead?

Bitcoin vs. real estate financing

Physical property almost always holds or grows its value because it is a limited resource. The same can be said about Bitcoin, as it has a capped supply. This scarcity is exactly what makes mortgages an important tool in real estate investing, and Bitcoin-backed loans provide a similar proposition. 

On the other hand, Bitcoin presents distinct benefits that distinguish it from conventional collateral options. With a daily trading volume of approximately $40 billion and operating around the clock on a global scale, Bitcoin is remarkably liquid. This high and largely untapped liquidity enables swift liquidation of large positions within minutes at any given moment, allowing lenders to quickly recoup their funds and minimize potential losses – thereby reducing the risk associated with a loan. Furthermore, Bitcoin’s low correlation with traditional asset classes makes it an appealing tool for diversification among institutional investors. Contrast this with mortgage financing, where the sale of property can take weeks or months, requiring a complex process consisting of numerous steps. The drawn-out liquidation process in real estate exposes lenders to increased risk when recovering value following a default, as they may encounter delays, market fluctuations, and potential losses.

Structural parallels: Bitcoin loans and equity financing

Bitcoin-backed loans operate with a structure more akin to equity financing in terms of underlying logic compared to traditional real estate financing. In equity financing, investors might face margin calls if the value of their investment decreases; for instance, if a stock’s price drops, the bank could request additional funds or sell some of the investor’s stocks to meet the loan requirements. Bitcoin-backed loans function similarly, but they come with several advantages.

A significant benefit of Bitcoin is its borderless nature. Unlike conventional assets that may differ greatly in quality due to regulatory and exchange differences among jurisdictions, Bitcoin is consistent for everyone worldwide. This consistency makes lending against Bitcoin less complex because it isn’t affected by the complications of varying regulations or property rights often associated with traditional lending. Whether a borrower resides in Canada or Argentina, the Bitcoin used as collateral remains unchanged, simplifying the lending process and minimizing geographic risks typical of cross-border financing.

Institutional investors: Attractive yields in a declining rate environment

In today’s financial market, Bitcoin-backed loans are becoming increasingly appealing. With worries growing that conventional fixed-income investments might not offer substantial returns in a low interest rate climate, these Bitcoin-backed loans present significantly higher interest rates, typically ranging from 12% to 14%. This enhanced return is due to the perceived risk associated with digital assets, but as more traditional financial institutions join this sector, we can anticipate that premium to shrink gradually.

Moving forward, we might witness the emergence of a secondary market for pooled Bitcoin loans, mirroring conventional financing methods. Furthermore, it’s possible that a securitization product could evolve in a manner similar to mortgage-backed securities, enhancing the industry’s professionalism, boosting liquidity, and potentially offering more competitive products and rates for both lenders and borrowers.

For institutional investors, Bitcoin-backed lending presents a compelling alternative to traditional fixed-income investments like money market funds and treasuries, especially in a declining interest rate environment. While the price of Bitcoin can be volatile, the over-collateralized structure and ability for near-instant liquidation of collateral provides substantial security for the protection of capital.

It’s worth mentioning that the field of Bitcoin lending is relatively new, similar to the initial stages of residential mortgages. At this point, only about 2% of all Bitcoins have been pledged as collateral, while around 60% of American homes do. As Bitcoin matures and gains more widespread acceptance, and people grow accustomed to using it for securing loans, the market potential for Bitcoin-backed loans is projected to expand significantly.

With more conventional banks venturing into the field, it seems that Bitcoin-based lending is transitioning from niche offerings to becoming a standard part of financial services. Yet, it’s the well-established digital currency companies who possess the specialized knowledge and practical experience in this distinctive sector at present.

Essentially, Bitcoin-supported lending marks a major step forward in finance, blending traditional lending’s strengths with Bitcoin’s distinctive features. This fusion provides unprecedented liquidity, universal accessibility, and the possibility of higher returns. As the market grows and regulation strengthens, we anticipate greater involvement from institutional investors, thereby legitimizing and broadening this intriguing new domain in lending.

As the advantages of a digitally native currency and continuous trading markets are increasingly recognized, more and more businesses are finding the allure of Bitcoin loans to be hard to resist.

In the changing financial world, it’s expected that Bitcoin-collateralized loans will grow in importance and impact the future of finance. This is because more businesses are becoming aware of the distinctive advantages these types of financial deals can provide.

The promises of Bitcoin-backed loans for institutional portfolios | Opinion

Adam Reeds

Adam Reeds, being the chief executive officer, co-founded Ledn – a globally recognized, Cayman Islands-regulated firm specializing in creating financial products to aid individuals in expanding their digital wealth. Prior to establishing Ledn, Adam spent a decade at Dream Asset Management, where he devised, constructed, and financed a $1.5 billion collection of renewable energy projects. His interest in Bitcoin’s relationship with energy propelled him into Bitcoin mining, which led him and his partner to recognize a financing gap for digital assets. Ledn now serves as a comprehensive financial services platform catering to clients across more than 120 countries, facilitating over $6B in digital asset-backed loans since its inception. Adam holds a degree from the HBA program at the Richard Ivey School of Business and also graduated with a Bachelor of Engineering Science from the University of Western Ontario.

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2024-11-05 14:12