Unlock the Hidden Riches of Crypto-Backed Loans!

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So, the crypto world is still not fully integrated with the U.S. banking system, huh? Well, that’s just a bunch of malarkey! But fear not, my friends, because this little hiccup has created an opportunity for crypto-natives to shine. 🌟

You see, these folks have something that traditional finance institutions are drooling over – good collateral. And they’re using it to borrow U.S. dollars (USD). The result? An asset-backed loan that has the potential to yield more than it “should.”

Now, I know what you’re thinking: “Larry, isn’t that what junk bonds are for?” Well, my dear Watson, these BTC-backed loans may actually offer more yield than junk bonds with less risk than investment-grade bonds. 💸

Overcollateralized BTC-backed loans are a possible solution for traditional finance institutions participating in crypto at scale. These transactions can be structured in a Tri-Party arrangement, which is when two parties engage a third party as a trusted custodian for funds held in escrow. This removes the need to custody crypto, handle margin calls and deal with selling the collateral under default conditions.

Crypto market participants and businesses simply do not have full access to the USD banking system. These BTC-backed loans are a possible solution to fill the gap. The collateral is good, tradable and liquid in both on- and offshore markets. This compares favorably with default conditions in corporate loans where bankruptcy proceedings can last for years (or decades).

A portfolio of such loans does not represent diversification since all these loans would be backed by cryptocurrency. However, that does mean that a portfolio may be hedged using the options* market, which has also become liquid in both listed and OTC markets for BTC.

The BTC-backed loan market is an opportunity that bridges crypto and traditional finance. It’s not meant to provide the sort of “degen” returns that may be available in outright positions but instead speaks to the sorts of investment parameters that come with vocabulary recognizable to the Patagonia vest-wearing crowd. Terms like “excess risk-adjusted return” and “harvesting premiums” are reminiscent of the 80s and 90s.

Written by Ari Pine, Co-Head of Exotic Derivatives* at BlockFills, a trading and market technology firm.

*Derivative Products available to Qualified Counterparties Only. For US Persons, client is an Eligible Contract Participant (“ECP”) as defined in Section 1a(18) of the Commodity Exchange Act and related guidance. Non-US Persons must qualify as an Eligible Professional Client. BlockFills only provides services to customers resident in the UK who fall within an exemption available under the UK financial promotion regime (Investment professionals, High net worth individuals, High net worth companies, unincorporated associations etc. Certified sophisticated investors).

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

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2025-02-19 19:40