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Bitcoin is Becoming a Security

Article was written by Ambroid

When we look at the bare basics, there are three types of assets in the world, and most things fit into one of the three brackets. I am talking about commodities, securities and monies.

Typically, an investment vehicle fits into one of these brackets, with some exceptions — a house is both a commodity and a security.

Commodities are generated at a cost, and are then usually turned into other commodities or outright consumed. Typical examples would be copper, beef, corn, or even a television. People invest in commodities because of their cyclical nature, but with the exception of gold, they are not a good long term store of value.

Securities are your typical investment vehicles — stocks, bonds and various derivatives thereof. One typically buys them with the expectation of a yield. The growth of the yield and/or value of the underlying asset should be mirrored in its price.

Money is the medium of exchange with which one buys the above. Securities are also an investment vehicle, because one can usually expect to loan them out and earn interest on them.

Notable exceptions:

  • Gold is both a commodity and a money — it holds special status due to its chemical stability and rarity. It is also generated slowly and predictably.
  • Land/RE is both a commodity and a security — it is scarce, it is generated slowly and expensively, and one can earn yield on it by renting it out.
  • Bonds — are considered both money and a security in certain circles, especially some very liquid government bonds used in interbank transactions.
  • Bitcoin — is a hybrid of a commodity and a money, since it is generated slowly and predictably. It therefore holds a special status due to its thermodynamic stability (mining) and rarity. The key difference, however, is that it is evolving over time and becoming a security.

How is Bitcoin becoming a security?

The simplest way to deduce whether something is a security is to answer the Howey test:

“a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

Based on this definition, Bitcoin, as is, is absolutely not a security. The caveat is that Bitcoin has always been programmable money and a dynamic asset constantly undergoing a shift of narratives surrounding it.

One of the most grand narratives crypto has seen is the boom of lending platforms and DeFi. Bitcoin is accepted to be both borrowed and used as a loan’s collateral.

There are now multitudes of options regarding lending out your Bitcoin — your options include centralized custodians, who offer a 6–12% yield on BTC. Most decentralized platforms are built on top of Ethereum, so if they offer BTC lending, it is only Wrapped Bitcoin. The collateral therefore has to be ERC20.

Now, Hodl Hodl is offering a new product — peer-to-peer Bitcoin lending, with Bitcoin as collateral and tokenized Bitcoin (Liquid Bitcoin and WBTC) as the borrowed asset. Currently Hodl Hodl is working on introducing native Bitcoin lending. Since the platform is noncustodial and the BTC is locked in a smart contract, KYC is not necessary.

This is a first. Lending out LBTC/WBTC with BTC as collateral is groundbreaking — it is an option attractive to both lenders and borrowers. As a lender, you are not losing out on any potential asset appreciation, and your holdings are technically secured in the asset that you lent out. As a borrower, you have a direct line of entry into DeFi on Ethereum without KYC or any other restrictions, globally.

And again; this is a first. Products like this will be imitated and built upon. Bitcoin is becoming a legitimate yield generating asset and therefore a security.

Why is Bitcoin becoming a security?

Bitcoin is gaining reputation as the hardest money out there, while staying liquid. Therefore, people have started accepting it both for a loan’s collateral and an asset they want to borrow.

Let’s unpack this: the hardness of money is a measure of how complicated it is to change its supply, its properties, and its lack of malleability (in a figurative sense).

Fiat money (USD, EUR, etc.) is fairly hard — its supply can only be changed by the central banks, who issue it. The supply generally changes slow enough and there’s so much money out there that we do not notice these changes on a day-to-day basis. We keep using this form of a medium of exchange, despite its drawbacks.

Gold is a much harder form of money — its supply has been growing slowly, at a fairly predictable rate (circa 2% per year over recorded history). Its properties are unique in a chemical and physical sense so people have, over long periods of time, filtered gold out as the best (hardest) form of money out of all the other options.

Gold is now being supplanted by Bitcoin on multiple fronts, ones which even gold itself has lost to fiat money over time.

Why isn’t gold a security then? Why is it not widely borrowed? Mainly inconvenience. Why go through the bother of moving actual bricks?

And if you’re supposed to use paper gold (through a contract), you might as well use regular dollars, right?

Bitcoin, on the other hand, is programmable and it is perfectly possible to lock it in a multisig smart contract (be it Lightning or Hodl Hodl). This way, raw Bitcoin (not its derivative) can be used as a security in multiple use cases.

What is the endgame for Bitcoin?

We’ve established that Bitcoin is a mix of commodity and money. On top of that, it is becoming a security. So the perfect scenario is Bitcoin becoming the alpha and omega of all asset classes — a perfect 1/3 mix of commodity/money/security, a widely accepted medium of exchange, loan collateral, yield generating asset and something that needs an underlying industry (mining) to keep it circulating.

In my eyes, that is also the endgame for a company such as MicroStrategy who publicly state they will NEVER sell their bitcoins. They just adopted the #stackingsats strategy promoted widely in the hardcore Bitcoin community. These retailers are convinced and they just want to save money in an increasingly insecure world, these companies have a gameplan.

People ask themselves: how is it possible that MicroStrategy plans to hold their Bitcoin forever? It must just be a marketing spiel, right?

I argue it will become a reality. The answer is evident by the act of lending one’s own bitcoins out for a yield.

And like it or not, that makes Bitcoin a security.

More articles by Ambroid: medium.com/@ambroidcrypto



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