Why is Bitcoin used as collateral for Loans?

Bitcoin is used as collateral for a loan for various reasons beneficial to users. Some of the reasons for using Bitcoin as collateral for a loan are arbitrage games, covering operating expenses without selling assets, creating a market, using leverage (buying more cryptocurrencies).

According to the data by Coinmarketrate.com, crypto lending segments have grown over these periods, helping hodl investors to get cash without selling their crypto assets. The evolution of assets from physical to digital has made this innovation attractive due to the simple process of obtaining loans. Paperwork has been eliminated, and getting a loan has now become quick and easy. The loan application is available to anyone who can meet the loan requirements. There is no bank involvement, and since the loan is digital, it is open to individuals around the world, which allows loans to overcome the barriers of international borders.

Bitcoin occupies a leading position in the world of cryptocurrencies, thanks to which it has been recognized as a store of value. In addition to the crypto lending platform, some financial institutions now accept Bitcoin as collateral to provide personal loans to individuals. The asset is used as collateral to obtain a loan due to its current and future value. His assessment made room for other promising cryptocurrencies, contributing to their growth and improvement of the cryptocurrency market.

There are various reasons why many investors, known as hodl investors, would like to get a loan using their main crypto asset (Bitcoin) as collateral.

Traditional Banking and Bitcoin

Some banks, such as Swiss ones, have started offering bank loans using Bitcoin as collateral. Although this has not been accepted by conventional financial institutions, lenders in this lending segment are now offering more realistic options. The competition that arises within these banks makes interest rates lower than usual and provides a wide range of loans, which introduces innovations into the world of lending, helping businesses.

The negative reaction that Bitcoin caused in the past has now been eliminated, as people have realized its benefits and how it has become a virtual currency in the world. Bitcoin has come to be regarded by many as an asset, just like any other asset, because of its valuation.

Due to the risk associated with using BTC as collateral for loans, interest rates are quite high, and the term of loans obtained using Bitcoin as collateral is relatively short. Bitcoin has proven to be more acceptable as collateral than other crypto assets because of its value, and investors will not want to sell their Bitcoin even if there is a temporary need for cash.

Hodl investors are mostly beneficiaries of these BTC-backed loans, as it helps them hold crypto assets in order to get an increase in the asset price. These investors analyzed the advantages of obtaining loans using Bitcoin as collateral than its actual sale for monetary profit, the experience of not virtual long-term benefits of BTC forced investors to learn from past mistakes.

Reasons for Using Bitcoin as Collateral for Loans

• Covering operating expenses

Miners benefit the most from using Bitcoin as collateral for loans. Miners are professional investors and are engaged in capital-intensive business. Therefore, in order to avoid selling the newly mined Bitcoin, it is necessary to cover operating expenses, which is done with the help of loans.

• Tax deferral

An investor may want to avoid paying the tax that would have been imposed in the event of a Bitcoin sale, and instead borrows cash to defer the tax, as well as satisfy his need for cash at that moment without selling his Bitcoin asset.

• Arbitration

This is a widespread case of borrowing. The cryptocurrency market still has the futuristic advantage of increasing profits, so traders pledge their BTC as collateral to borrow cash. The concept of arbitrage is a strategy in which a spot trader shortens the price of a futures contract, and therefore holds the asset until expiration. Most investors use the arbitrage option.

• Shoulder augmentation

Most experts use this strategy to increase their presence in the cryptocurrency market, where they pledge their Bitcoin as collateral to borrow cash, and then use it to buy more BTC or other cryptocurrencies. Although the exchange of derivatives offers the same increase in the exposure of cryptocurrencies, the use of leverage in trading through the collection of collateral gives a completely different sales process. The structure of collateral collection is completely different from the structure of derivative exchanges. When using leverage, enterprises have no goal to liquidate the cryptocurrency of their borrowers, but in the short-term market there is even a liquidation fee, which is the reason for the growing popularity of leveraged lending.

Platforms working with Bitcoin collateral loans

Despite the fact that many financial institutions are not ready to accept Bitcoin as collateral for loans due to its risky nature. Banks always strive to operate in a safe credit space in order to avoid losses that could have been prevented.

While large institutions refuse to accept BTC as collateral, several companies have taken advantage of this innovation and solved the main problem for crypto-hodlers. Here are some of the companies providing loans secured by Bitcoin.

YouHolder

This platform uses Bitcoin as collateral for loans, and they issue both large amounts of $30,000 and low amounts of $100 to all users who meet its requirements. In addition to Bitcoin, YouHolder also receives six crypto assets as collateral, which helps users to store crypto rather than sell them. This solves a huge problem, as it helps investors get cash without liquidating their Bitcoin. The loan period is short, lasts about 120 days.

Salt Lending

The benefits of receiving Bitcoin as collateral are huge, and Salt lending saw this potential profit and took up the credit space, taking on risks that companies are not ready to take when providing a loan secured, even by the military-technical cooperation. Although interest rates are higher here than in a traditional credit institution.

This platform also operates like other platforms, with a special approach called peer-to-peer, offering cash for BTC without actually selling. And it acts more like a marketplace for both its borrowers and its customers.