Why Bitcoin Is Pristine Collateral For Lending

Because Bitcoin is superior to real estate, its attributes will make it an ideal collateral for lending.

This opinion editorial is by Leon Wankum. Leon was one of the first students in financial economics to write a thesis on Bitcoin in 2015.

Real estate is the most popular form of collateral that a borrower can use to secure repayment of a loan. This is common with mortgages, personal loans, and business loans. People and institutions who own real estate can get loans from banks. Stocks, bonds, cash and business inventory are all common collateral. I'll show you why bitcoin could be the collateral of your choice in the future.

A variety of lending products are being developed around bitcoin. Bitcoin is a non-bearer instrument that can be used as collateral. Bitcoin's hard-capped supply schedule and deterministic supply makes it attractive to keep it. This has led to a need for bitcoin users who want to lend their holdings in exchange for cash or yield. It is economically sensible to borrow against bitcoin for two reasons. There is a capital gains tax on any sale and a spending tax on bitcoin.

Bitcoin should not be used to earn yield, but to borrow against it. It is not worth the risk of earning a 6% return while losing it all. Non-custodial solutions such as Hodl Hodl are also available for lending purposes. Multisignature wallets allow lenders and borrowers to share funds by requiring more than one signer to move the funds.

As a borrower, you can still have a cryptographic relation with your bitcoin. Let's say you want to borrow bitcoin against it using a multisig account. This will allow you to access the address via any blockchain explorer, not just through the platforms' interface. This allows you to check that all your collateral is in the same location and can even monitor your escrow account live. This eliminates the risk of rehypothecation, which is when banks and brokers use collateral posted by clients for their own ends.

Nick Neuman explained that the fact that bitcoin addresses and transactions can be publicly verified removes a lot of risk from the financial system. This allows for proof that reserves have been established. To prove their reserves, a financial institution must show their bitcoin address and transaction history. Financial service providers must be more transparent to ensure transparency.

It is easy to store bitcoins, and there is no need for daily maintenance. It is enough to keep bitcoin safe from hackers. An online financial service provider can create a cold wallet, which is a device that stores bitcoin offline, and protect it from theft. You can also store bitcoin in a multisignature wallet. This allows lenders and borrowers to share funds and protects the borrower from bankruptcy. The borrower would then lose their money.

The cost of maintaining the collateral is lower with bitcoin. The bank usually has a lot of auditors and appraisers who constantly evaluate the collateral. Valuing real estate takes a lot of time. There are certain standards that determine how real estate should be valued. These standards are always changing so properties should be valued individually depending on their location and condition. Bitcoin on the other hand has a market price that is real-time and accessible to all.

Real estate is the preferred collateral form. This can also lead to social problems. This has led to an exclusive financial system that makes it more difficult to get credit, as real estate is becoming more expensive and less affordable.

Since 1971, house prices have increased by nearly 70 percent. This corresponds to President Nixon's "Nixon shock" on August 15, 1971 when he announced that the United States would no longer convert the US dollar into silver. The new era of fiat money was established by central banks. They operate a fiat-money-based system that has floating exchange rates and no currency standards (history.state.gov). Inflation rates have steadily risen since then. To secure their wealth, many have turned to real property. Real estate has lost its fair value due to its utility. It is an income-generating asset that can be used for manufacturing. It is now primarily used to store value by institutions and for those trying to combat monetary inflation. Bitcoin, on the other hand, is simple to buy, store and use. Bitcoin can be bought for as low as one dollar. Bitcoin makes it much easier to get credit.

Particularly, using bitcoin as collateral allows for easy access for developing countries to credit systems. Bitcoin can be used to save money and later for credit in countries like Indonesia that have limited credit markets.

Bitcoin also allows for a more private financial system. A cryptographic key could be used by a lender to authenticate a borrower, without the borrower having to disclose sensitive information. This could allow the lender to leak data to the Internet.

A bitcoin sale, just like a stock can be completed quickly in the event of default by a borrower. Bitcoin markets operate 24 hours a days, 365 days a calendar. If necessary, a sale can be made at any hour. If the borrower defaults, real estate must go through an auction process. Another reason bitcoin can be used as collateral is that it is predestined. Lenders require that bitcoin-backed loans are overcollateralized due to the volatile price of bitcoin. This is a good thing, not a problem. It requires greater financial discipline on the part of the borrower. This usually results in higher efficiency and productivity. This practice will change as volatility decreases with greater adoption.


Bitcoin's outstanding properties make it an ideal collateral type for lenders and borrowers. Bitcoin lending services will decrease the incentive for anyone ever to sell. This will have a positive effect on the price. See: Allen Farrington, Sacha Meyers, "Bitcoin is Venice," page 161.

Over the last century, the West's improved property systems have allowed economic actors to realize their potential and increase productivity. This system has been distorted by fiat money. Bitcoin will bring it back and expand it all over the globe. Bitcoin, as digital property will make it easier to own property and use it for credit. This will allow for greater efficiency and productivity in the global economy.

Leon Wankum contributed this guest post. These opinions are not necessarily those of Bitcoin Magazine or BTC Inc.

By: Leon Wankum
Title: Why Bitcoin Is Pristine Collateral For Lending
Sourced From: bitcoinmagazine.com/business/why-bitcoin-is-pristine-collateral
Published Date: Wed, 14 Sep 2022 00:45:00 GMT

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