Loans secured by Bitcoin are services where you can borrow money and use your Bitcoin as collateral. As someone who's invested in Bitcoin, what's your take on this? Would you feel okay using your Bitcoin as collateral for a loan? A lot of folks do this so they can hold onto their Bitcoin instead of selling it, especially when times get tough financially. They really believe in Bitcoin and think its value is only going to go up.
But it's interesting because those who put their Bitcoin up as collateral get that it's valuable, yet they might not fully grasp the risks involved. One thing to keep in mind is that if you can't repay the loan and the Bitcoin's price drops, the lending platform could sell your Bitcoin to protect themselves from losses.
I'm honestly baffled by how many people are ready to part with their precious Bitcoin for these loans, especially when the platforms themselves seem to treat Bitcoin's volatility as a major risk.
I don't know how it's done. what I'll like to know is that do they require your keys to you holding as part of the collateral? Or they just want to see a wallet with bitcoin Balance in it? Or it is some way that you deposit your bitcoin with their wallet and get your loan from them and probably get your bitcoin back when you liquidate the loan?
I don't really understand and I can't really figure out the process, but just from my though it will not be a good idea to involve my self regardless of my financial situation.
Have you read about one of the means rich men avoid paying tax? They will not sell their stocks (bitcoin according to to the discussion on this thread), borrow fiat instead and use the asset as collateral. This does not mean it will be during financial crises.
I have borrowed 2000 USDT before from Shasan on this forum because I did not want to sell my bitcoin. It was during bull market at the time. It is a strategy and not bad at all.
I have heard about such practice before, and I'm pretty much sure that this Bitcoin-backed loan are usually done on crypto exchanges, just like Binance, Coinbase or Bitget, whereby you need to have your Bitcoin on the exchange wallet first, and in a scenario whereby you happens to be in urgent need for funds, instead of withdrawing your Bitcoin from the crypto exchange, they can agree to give you an equivalent loan in stable coins like USDT, to be paid back with interest after a certain period of time. While your Bitcoin remains locked on the platform with them. So that's how it works.
I guess you did not use your Bitcoin hodling as a collateral.?
Actually I dont know how these platforms works, if they demand for private keys. But from research it seems if one is unable to pay loan, they can sell out your asset to get back their money.
You can use your bitcoin as a collateral for your loan with another person, any business that accepts the deal with you. However, even you're able to do this, and actually do it a first time, after taking a loan, you must sit down and think very carefully on reasons that forced you doing that loan. It shows that you actually did made bad financial and risk management so that you fell into a situation that requires you taking a loan.
By using your bitcoin as a loan collateral, you put your bitcoin at risk, and if you can not pay the loan interest, or something worse, you will lose your bitcoin. It's not a recommended practice for Bitcoin investors. If you eventually managed to finish the loan well, you must change your financial and risk management, and avoid similar risk situation in the future.
That is true, I did not use my bitcoin as collateral, but I did not want to sell it either.
Yes, they will sell your asset if the person is not able to pay back the loan.
What I know is that you have to send the site the bitcoin and they will send you USDT. There is one that I know, but I do not want to mention the name because I do not know how trustworthy they are.
They will not ask for you private key, but maybe another site may be different.
It is similar to any kind of collateral loan, just that this time your collateral is your BTC. You receive a loan and you deposit your BTC as collateral. If it all goes well and you repay the loan + the interest, you get your BTC back.
However, because BTC is a volatile asset, you also run the risk of your BTC being liquidated if it drops below the threshold set by the lender, in that case you'd either have to deposit more coins or the lender would be forced to sell your deposit.
In this case, he indirectly used his Bitcoin as collateral, simply because he is a trusted member on this forum and the lender knew that he was capable of repaying back the loan during the timeframe. So you can either offer your Bitcoin as collateral directly or indirectly. But the medium through which you does it is what matters. But on this forum, you can do that indirectly, but on other platforms, you need to have your Bitcoin deposited on their platform.
Some platform will require you to deposit your Bitcoin on their platform where they have full control over it, and in a scenario whereby you fail to repay at appointed time, your Bitcoin can be sold in place of it.
Some people may find this interesting to use because they don't want to sell their bitcoin and at the same time needed fund to source out some demands ahead of them, if you think the platform is reputable you can make use of them, but at the same time are they not going to use your same bitcoin to make investments, things like this do happen and there are many services and offers like this along with Bitcoin as long as we are in the area of developed digital technology.
Michael Saylor has written extensively about Bitcoin-backed loans in the past. I think this clearly demonstrates that his worldview differs greatly from that of many of our regular forum members. Michael Saylor is a Wall Street financier. And, therefore, he thinks like a Wall Street financier... I think that for many Bitcoin enthusiasts, using Bitcoin as collateral seems like a very bad idea. 🙋
Michael Saylor also seems to have realized that this is an unprofitable business. And it's far from certain that he'll live long enough to pledge his 800,000 BTC (or 1,000,000 BTC) to banks or other financial institutions. That's why, in my opinion, he recently stated that he's willing to sell his Bitcoin in exceptional circumstances.
By pledging your Bitcoin as collateral, you lose control of it. Instead of private keys, you gain access to fiat money, but you no longer own Bitcoin. If the Bitcoin price suddenly drops by 20-30%, your collateral will be sold. Even if the Bitcoin price recovers to its previous level within 5 minutes.🤷
It might be possible, but I seriously don't see how fixable this is. Don't forget that for it to be a collateral you most likely are going to be sending them your coins, so when you fail to meet your end of the bargain they have something to hold onto.. but isn't that worse than selling your coins? Instead of taking loan because you are scared of missing the market, it better to sell a portion of your coins or rather have a back up plan for your investment.. I doubt anyone uses this idea at all because it's literally not realistic. Don't give access to your bitcoin to anyone. If you have an issue that really needs to be sorted out and your BTC investment is the last resort of money you have, it's better to use it. I don't see the benefit of this..
Exactly, when Bitcoin price goes down before it touches the borrowed money they will sell the collateral and also place a huge fine ro liquidation. That's why it's recommend to always borrow half of what you collateral. They set a indicator like health factor. If it goes below 1.00 then they consider it as liquidated. Recommend health factor is 1.60+, Different platform has different rule so please check those before you borrow something.
Why do people look at loans and borrowing with so much disdain? It's better for taxes and the whole financial system, and the economy is built on it. Before you talk down on a loan, look at the context. If a person is willing to take a loan, instead of just selling his bitcoin to finance whatever he wants to, then there ought to be a reason for it. If things go bad for him, worst-case scenario, he is going to do what you suggest he should have done in the first place.
Individuals, businesses, big corporations, both public and private, take loans in different forms all the time. Even governments take loans in the form of T-bills and bonds. Taking a loan is only bad when it is not a calculated risk and so a business or government, when it is taken for consumption, but as long as it is to invest with it, then I don't see a problem with it.
Also, selling your bitcoin means you have to pay capital gains tax if you've made any profit from it. People try to avoid paying taxes by borrowing against their bitcoin. You don't need to pay taxes on a loan. It doesn't matter if you've made a billion dollars out of your bitcoin holdings, you won't be taxed unless you have taken a profit one way or the other.
You only give it away if you're not able to pay the loan you borrowed. If they had sold their bitcoin for the business and lost it, it would have been the same thing. So the losses are the same, or almost the same, but if the business goes well and you pay off the loan on time, it favours you because you still have your bitcoin intact, and whatever you needed the money for has been solved.
In times of desperation, I do think that it's just fine when you have nothing else behind you to back you.
It's even a good thing that you'll have something to be used for collateral and that's Bitcoin.
If you're in need of that much money and you can use your Bitcoin against it, the wise idea is not to wholly put all of your Bitcoins in that collateral.
That's just a privilege when the banks won't give you that loan because you're holding bitcoin that means nothing to them.
As for these platforms and exchanges that allows to do it, they know that you'll definitely pay back that loan when you want to take back your BTC collateral.
Theyre a sure-fire way to lose the Bitcoin you put up as collateral. In theory, for people who think things through and have substantial capital, it can work very well. The problem is that this became popular and the average Joe jumped in with practically all their capital when the price broke through $100,000, thinking it would rise much further, and when it fell, they ended up selling at a loss to avoid being liquidated.
Its fine if you have a lot of capital and put in just a small portion (say, 5%) to gain liquidity, but the retail investor is nowhere near managing those percentages.
Michael Saylor with MSTR also did Bitcoin-backed loans before switching his strategy to Convertible Bonds [1]. He treats Bitcoin the same way as property investment. I think it is the best way to make Bitcoin productive. To use it without losing it (if you do it correctly).
Also, there are some BTCFi platforms that claim they can do all these things on-chain, so no custodian is involved. Maybe you can research more about them. So there is no more worry about the risk (or at least a more minimal risk) compared to centralized Bitcoin-backed loans.
And speaking of Bitcoin-backed loans, I'm not sure if you already know about this. Two months ago, Coinbase partnered with Better to launch the first crypto-backed conforming mortgages in the US, backed by Fannie Mae [2]. With this, people can use Bitcoin or USDC as collateral/down payment support without selling their crypto assets.
Source:
[1] https://www.reddit.com/r/wallstreetbets/comments/1gxc1fe/a_plain_english_explanation_of_mstrs_convertible/
[2] https://www.coinbase.com/en-gb/blog/coinbase-powers-the-first-crypto-backed-conforming-mortgages-by-better
I've seen something similar in centralized exchanges, although I haven't used it before, so I don't really know how it works. I guess they'll just hold ur crypto while they lend you probably in USDT or so.
It is quiet a good initiative honestly, and it seems decentralized finances also do this too through smart contracts. But basically it's holding ur coins while loaning out a stable coin, but I heard if it's value drops significantly, they'll liquidate early.
This can help in hodling, with this, Bitcoin investment can be a little bit easy even for newbies. Wen u feel d need to sell off some Bitcoin, u can just take out loans and pay back when ur comfortable.
This will be my last option if I am in a financial distress. It will be better to use it as collateral for a loan that to sell it below the cost price therefore incurring higher losses.
The conditions for loans vary, so you would have to read and understand them before entering into an agreement. But if a debtor defaults on a loan contract, there should be consequences which could include taking possession of collateral.
Providing an example of a company with such a policy would be acceptable. I doubt if these platforms understand or believe in Bitcoin. I think many of them know that there are always bear and bull markets. I will advise people who want to use their Bitcoin as collateral to be careful. They should deal with registered and reputable service providers.
Most times, when we use an asset as a collateral, we don't do that with the plan that things will go wrong and the asset will be sold. We take up loans because we believe that before the expiration of our loans we will be able to pay it off and members of this forum can easily relate to that with respect to taking up loans from shasan.
if I take up a loan and can't pay up at it expiration, I would rather look for an alternative to pay it up rather than wait and risk giving my bitcoin out even though I used it as a collateral. Moreover, I can only use bitcoin as a collateral when the loan I'm taking is in bitcoin.