Bitcoin — the best collateral
The principles of Bitcoin-backed loans
No one can deny the fact that hoarding low-risk assets such as gold, real estate, US treasury bonds, etc., has always been a tremendous comparative advantage compared to those being the owners of higher-risk assets, such as shares, sovereign bonds of emerging countries, cash in bank accounts, or other similar instruments.
Where do we place Bitcoin in this comparison list?
The majority of the uninformed public would not doubt it for a moment and place it in the “extremely high risk” category since they base their analysis on short-term volatility, and that is where the main error lies. Not studying Bitcoin from a broader perspective leads them to believe it is just one more risky asset among many others, which does not deserve a lot of trust given the constant volatility of its price.
However, if one makes a more detailed study and expands the view to a broader perspective of time, one will find a completely different picture. Looking deeper, anyone can quickly come across the fundamentals of Bitcoin: pre-established and limited issuance, censorship-resistance, fungibility, global liquidity; to cite just a few, which are not even replicable by any of the low-risk assets mentioned above.
Suppose we watch the price by extending the time horizon from a few weeks or months to several years or a decade (as all reserve assets should be evaluated). In that case, we will see that not only has volatility been markedly reduced over time, but the price maintains the long-term upward trend. This is perfectly logical when we take into consideration the rigorous monetary foundations and incentives associated with the game theory played off in the Bitcoin economy.
This is why associating Bitcoin with a high-risk asset does not make much sense when we see it from a long-term perspective. And if we add to this the severe and increasing inflationary problems of fiduciary currencies, we will find that all the assets denominated in them, bonds, stocks, options, etc., are also likely to lose value year after year, since although the increase of its nominal price gives us the feeling of higher valuation. The reality is that the inflation of the underlying asset will mean that at the end of the day, the return on that investment will be null or even negative.
On the contrary, Bitcoin is issued less and less (its monetary issuance is halved every 4 years, in protocol events called “halvings”). Its growing demand and its inelastic supply mean that the only possible variable of change is the price, which will inevitably go up indefinitely since it is very difficult to foresee a change in the monetary policies of the national states, which always tend to finance their deficit with more monetary emission as they have been doing for more than a century.
The graph above demonstrates how after each “halving,” the price resumes its upward trajectory, mainly because shortly after the abrupt reduction in the issuance, scarcity begins to be perceived in the market. Those who understand this dynamic also understand that the best long-term strategy is to hold onto their Bitcoin for as long as possible.
But in an economy transitioning to hyper-bitcoinization, how can we go about our day-to-day life if we only have BTC and don’t want to spend it? We can evaluate this situation by making a parallel with what high-net-worth individuals, who have solid low-risk assets such as important real estate properties, do today. These individuals have the possibility of borrowing the liquidity they need using their real estate properties to secure their payments. These long-term loans are quickly devalued by prevailing inflation, which always ends up being much higher than the interest rates set by governments, and the borrower ends up highly benefited.
If we consider Bitcoin a highly prized asset and much more liquid than real estate, we will conclude that it is the ideal collateral asset since it is immediately available and has comparatively unmatched liquidity. Borrowing fiat-pegged stablecoins collateralized with Bitcoin is a no-brainer, making both lender and borrower feel safe.
For this reason, we developed our P2P lending platform, “Lend at Hodl Hodl,” where anyone in the world can both take and grant loans with the security of having the best collateral possible, Bitcoin. And we did it in such a way that it is not necessary to trust either your counter-party or the platform since we do not keep the funds in deposit, but rather they are held in a multi-signature BTC address, and you control the keys to it.
Once the borrower deposits BTC as collateral at a given escrow address, the lender sends the agreed-upon stablecoins directly to the address indicated by the borrower. When the contract comes to maturity, the borrower returns the loan plus the interest and refunds his BTC from the collateral address providing his signature along with the lender’s.
In this way, any BTC holder can obtain immediate liquidity without the need to sell their Bitcoin and can repay the loan in as many installments as they wish or can decide to pay off the debt directly at the end of the contract from the collateral.
All of this is done without the need to provide credit history, guarantees, or any private information; besides that, it is entirely anonymous. While an over-collateralizing Bitcoin loan is enough to guarantee repayment.
Any person or company that needs liquidity for the acquisition of a capital good such as specific machinery to expand or improve its production, open a new branch of its business, or renew its fleet of vehicles; can apply for an immediate loan and then repay it over time with the returns that this new capital good grants to their business.
We consider our lending platform a unique market tool since it is open to use by any individual or company in the world, without geographic or regulatory restrictions, does not require trust in any of the participants, and is purely P2P without the intervention of any control or surveillance entity.
Bitcoin gives everybody the chance to become sovereign individuals. Let’s take advantage of these tools and keep moving towards a better future.
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