The Bitcoin-backed loans market is set to grow significantly in the coming years. In fact, it's expected to expand fivefold. Let’s break down what this means.
On January 16, Coinbase relaunched its Bitcoin-backed loan service. This allows U.S. users to borrow USDC by using their Bitcoin as collateral. The service combines aspects of centralized finance (CeFi) and decentralized finance (DeFi). Coinbase converts BTC into wrapped BTC (cbBTC) and sends it to Morpho, a DeFi protocol built on Base. Morpho then manages the loan terms and interest rates.
While the idea of Bitcoin-backed loans isn't new—it's been around since at least 2017—this move signals a potential rise in market demand. According to a report from HTF Market Intelligence in August 2024, the current Bitcoin loan market is valued at $8.6 billion. They project it could reach $45.6 billion by 2030.
Using Bitcoin can be a smart strategy, but it comes with risks. Remember Celsius? Some investors see traditional finance institutions entering this space as a sign that Bitcoin-backed loans could be safer. Take Cantor Fitzgerald, for example. This New York financial firm invested in Tether and started a Bitcoin lending program in November 2024.
On January 23, the SEC lifted the SAB 121 accounting rule. This change allows publicly traded banks to develop their own Bitcoin-backed loan services.
Bitcoin-backed loans let users access the value of their Bitcoin without selling it. This can help investors avoid taxable events. Investor Mark Harvey points out that these loans support the "buy, borrow, die" strategy. He suggests that by using 1 BTC as collateral at a conservative 10% loan-to-value ratio, an investor could secure $9,784 in cash in the first year. If the investor borrows against the rising value of Bitcoin each year—assuming a 50% annual increase—the cash flow could reach $164,000 over a decade. This creates a cycle aimed at maximizing gains while minimizing taxes.
From a lender's perspective, using Bitcoin as collateral can reduce risks. Andrew Hohns, CEO of Newmarket Capital, shared with CNBC that his firm uses this innovative lending strategy. They lent money to a real estate owner, who then purchased Bitcoin and added it as collateral. This approach gives lenders better protection and a more diversified risk profile. Hohns stated, “By combining Bitcoin with credit and traditional assets, we can express a medium-term view on Bitcoin.”
Currently, about 20 service providers allow users to borrow stablecoins and fiat using Bitcoin as collateral. Companies like Wirex, Nexo, and Bitcoin Suisse, as well as DeFi protocols like Aave and Compound, enable investors to use wrapped Bitcoin (wBTC) as collateral. Crypto-backed loans from CeFi firms surged from 2019 to 2022 but faced challenges when misuse and theft of customer funds led to the collapse of Celsius, BlockFi, and Voyager Digital. DeFi loans offer more transparency but come with their own issues, such as smart contract vulnerabilities and a lack of regulation.
While many praise Bitcoin loan services, some remain cautious. Investor Brad Mills, who identifies as a "value maximalist," mentioned in a post that he hasn’t used any Bitcoin loan services, even though he invests in companies that develop them. He values his Bitcoin more than his equity in Bitcoin-related businesses, saying, “I won’t recommend a service I wouldn’t use personally.”
Until January 23, most major banks couldn’t offer Bitcoin-backed loans due to the SEC’s SAB 121 rule. This rule required publicly traded companies to report crypto assets held for clients as liabilities. This made things tricky for banks, as capital requirements are closely tied to balance sheet contents. Although both the House and Senate voted to repeal SAB 121, former President Biden vetoed it, keeping the rule intact but allowing some exceptions for BNY Mellon.
The SEC’s decision to rescind this guidance on January 23 marks a significant shift, potentially opening the door for banks to enter the Bitcoin-backed loan market. Additionally, Coinbase's legal team clarified that the FDIC was compelled to further un-redact the “pause letters” sent to banks in 2022 and 2023. Nic Carter highlighted 25 FDIC documents requesting banks to stop various Bitcoin-related operations.
The recent pro-crypto stance among U.S. legislators is likely to increase Bitcoin exposure among major banks. This could boost crypto adoption and reduce sell pressure on Bitcoin, potentially driving its price higher. For users and investors, a larger Bitcoin loan market may lead to more competitive rates and better loan conditions.