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Bitcoin’s Traits Might Lead to Its Use as Collateral for Lending 

Bitcoin’s Traits Might Lead to Its Use as Collateral for Lending 

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When applying for a loan, you come across the term: collateral. It is an asset that the lender accepts as collateral for the loan. If you default on the loan, the lender can seize the collateral and sell it to repay the debt. The financial institution needs a guarantee that the loan it gives to the buyer is not a lost fund. Collateral is typically real estate. Since the collateral guarantees that you will pay the money back, a collateralized loan has lower interest rates. You have a compelling reason to pay the loan on time, because you will lose the property you gave as collateral.

In addition to real estate, other common collateral includes vehicles, gold, cash, stocks and bonds. Soon, Bitcoin (BTC) will be used on a large scale as collateral for lending. Currently, only a few companies accept BTC as collateral for a loan. Bitcoin can be used to take out a stablecoin loan and acts as an insurance instrument for the lender. You have to pledge a certain amount of your digital assets to receive a percentage of the value of that asset in stablecoins. You can use the liquidity without selling your stake, which can be a tax advantage.

There are two types of crypto loans namely centralized finance (CeFi) and decentralized finance (DeFi). The former is a crypto-secured loan where the lender has full control over the Bitcoin during the repayment period, while the latter relies on smart contracts to ensure the borrower meets the loan requirements. When you get the money, you can do whatever you want with it. Think carefully about the loan-to-value ratio. Make sure you know what you are doing and time the market perfectly.

Is Bitcoin the perfect collateral asset? Let’s find out

Bitcoin is an asset, not a currency as many mistakenly believe. Investors are savvy and know that holding BTC in a wallet is a real benefit that deserves attention. Its money supply is fixed and Bitcoin is not inflationary. The price of BTC changes on a larger scale than local currencies, so you should consult a financial advisor before making any major decisions. There is a big difference between Bitcoin and stocks and bonds from a financial perspective. Now back to the topic at hand, it makes sense that BTC should be used as security. Although some banks have started offering traditional loans using Bitcoin as collateral, it is not the norm in the market.

The Case for Bitcoin as Collateral

As Bitcoin grows in importance in mainstream finance, it is of paramount importance that it is examined to see how it would fit into our current systems and institutions. First, BTC is unlike any other asset class. More precisely, it is available for trading 24 hours a day, seven days a week, anywhere in the world. Digital money can be transferred on the spot, free of charge, at any time. Each user is identified by several combinations of number keys. Since there is no name attached to any user, the transactions are private. Bitcoin is without counterparty risk. It is not likely that one of the parties to the transaction will neglect its contractual obligations.

One of the biggest sources of counterparty risk in the modern financial system is collateral rehypothecation. The collateral used in one transaction is used in one or two new transactions. Simply put, a lender borrows money from another financial institution using the property you originally provided as collateral. If you are lending against your BTC, you can access the wallet address through the web platform interface or blockchain explorer. You can check if the collateral is kept in the same place and monitor your escrow account in real time. Events are searchable in the database by anyone who can access it.

As mentioned earlier, some institutions have entered the loan market. It is estimated that around 400,000 BTC have already been used as collateral in the market. Reasons for using Bitcoin as collateral for loans include leveraging existing positions, arbitrage games, market making, and covering operating costs without selling holdings. BTC storage is simple and requires no daily maintenance. It just needs to be protected from cyber attacks. The most common type of crypto scams are phishing emails, where malicious actors send emails asking for account login information.

Leverage: Buy more Bitcoins

By insuring Bitcoin and other cryptocurrencies, you get a cash loan that you can use right away. From a consumption perspective, you are encouraged to use fiat money. Your attempt to exchange it for goods and services will undoubtedly succeed. Likewise, you can use the loan to buy more cryptocurrencies. Leveraged trading through lending means a completely different liquidation process. You are not automatically liquidated. In fact, you have a few days to deposit more collateral to save your position. It is not in the interest of loan companies that customers go into liquidation. In the derivatives market, the situation is completely different.

There are considerable opportunities for leveraged trading of digital assets. Both sides of the equation are protected by the blockchain protocol, so they find inherent value in leveraged trading and secured lending. Although there is a possibility of great income, there is no guarantee. As a result, leveraged trading is only suitable for experienced traders. If you want to go ahead with your plan, research your financial situation, determine how much you are willing to risk, and do a detailed analysis of the cryptocurrencies you want to trade. The combination of BTC and stablecoins reduces the sensitivity of your portfolio to market fluctuations.

In summary, BTC can be used as collateral for a loan in the near future. Bitcoin blockchain is the most secure, mining is decentralized and traditional market participants provide liquidity. The collateral itself can be used for further investment. Stablecoins can be used for secured loans, but they involve counterparty risk. The consequences for the borrower can be disastrous.

The post Features of Bitcoin may lead to its use as loan collateral appeared first on CoinChapter.

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