Seamus Rocca, the CEO of Xapo Bank, believes the next step in crypto finance is Bitcoin backed loans. It seems like a sensible step in the progression of the industry.
Actually, I think this will be the case for all of crypto. There will be many lending platforms set up utilizing the value that resides in different coins and tokens.
Like most things in crypto, Bitcoin will likely be the first to have this integrated. I can foresee traditional firms moving in this direction.
In fact, they already are.
Let us dive in and see what could be unfolding.
The above image is from Coinbase. Earlier this year, the crypto exchange started offering loans paid in USDC against Bitcoin.
Update: As of April 30, 2025, customers can borrow up to $1M in USDC against their Bitcoin to cover any of life’s expenses without selling their bitcoin. Bitcoin-backed loans are available to all customers in the U.S., excluding New York. We’re also planning to expand BTC-backed loans to more countries. Stay tuned.
Coinbase appears to be appealing to the average investor. My view on this is based upon the mention of "life's expenses". This is how working people think. The wealthy have a much different mindset.
When it comes to wealth building, the successful think in terms of accessing value and leveraging it for a return. In this situation, instead of taking a loan to pay expenses, one might use the USDC to garner a return in another investment.
In other words, one would simply be engage in interest rate arbitrage. The goal is to get a return that exceeds the interest charged on the loan.
Nevertheless, we are looking at something that is likely to spread. There is no reason to believe that mortgages, automotive, and other types of loans will not incorporate crypto.
Even Coinbase is promoting the idea of on-chain activity. Of course, we have to be careful since that company did build Base, its own network for moving around of assets.
Crypto-backed loans are another major step towards empowering our customers with greater control over their financial lives. Coinbase customers can now get easier, faster access to everyday financial services, leveraging onchain innovation across Coinbase, Base, and the wider cryptoeconomy. They benefit from the transparent, decentralized services enabled by onchain protocols, which can now be accessed through a more seamless, intuitive user experience on Coinbase.
Not to be outdone, Xapo Bank is doing the same thing.
On March 18, Xapo Bank launched a lending product that allows users to borrow US dollars using their Bitcoin as collateral. With the product, qualified clients can access up to $1 million in loans while keeping their BTC.
The entire lending is based upon loan-to-value. This is nothing new, something banks do all the time.
Anyone who has taken out a mortgage understands this. Usually, a lender will not lend over the value of the property. In fact, there is usually a limit to which they will lend, commonly 80% in the US, before more assurances are required.
Bitcoin lending operates the same way.
The Xapo Bank CEO said that its Bitcoin-backed loans offer loan-to-value (LTV) ratios of 20%, 30% and 40%, giving borrowers flexibility while managing risk. “If you get a 20% LTV loan and you have 100 Bitcoin, as a lot of early adopters do, that’s still a couple of million dollars you can borrow without having to sell them,” Rocca said.
With conservative LTV levels like 20%, Bitcoin must fall below $40,000 for borrowers to get liquidated. “We’re nowhere near $40,000,” Rocca told Cointelegraph, pointing to the current price stability as a reason for growing borrower confidence.
All of this sounds good in theory, since the upside is always highlighted. This was the problem we had in 2007. Theory broke from reality.
During that period, housing prices, the underlying asset, collapsed. This led defaults on the loans as LTV crashed and people stopped paying their mortgages. All that was built on top of it imploded.
Bitcoin has one benefit, or flaw, depending upon how it is being looked it. This is a great asset to trade due to the volatility. While the above quote mentioned price stability, nobody in their right mind will claim Bitcoin is stable. It is the exact opposite.
This, of course, makes it very popular with traders. They can ride the waves to profit (or get crushed by them). However, as a unit of collateral, this causes problem.
There were periods where Bitcoin did see greater than 50% price declines. We saw what happened with the Great Financial Crisis due to the housing collapse which hit 40% drops in only a few markets. The majority were around 25%-30%.
Bitcoin could double that.
It does not mean that all is lost. Bitcoin, in my view, strengthens as an asset of collateral the longer the time period. Basically, for short term lending it is misplaced. The volatility kills it. If, however, we think about a supplement to the mortgage market, then we are looking at something much different.
Mortgages tend to be 15 or 30 years. In the US, people remain in their homes an average of 7 years. How does Bitcoin tend to perform over a 7-10 year period?
If we want to go one step further, consider the loan on a port. There might be an agreement for 100 years. Could that be backed by Bitcoin?
When the timeframe is too short, a borrower is essentially a speculator, hoping the price of the asset (BTC) remains high enough to avoid liquidation.
We do not need the majority people essentially using margin to borrow. That said, there are certainly major use cases where BTC could be used for lending. Think about what governments could do if they were holding Bitcoin as part of their reserve.
