Bitcoin Loan VS Bitcoin-backed Loans: Pros & Cons \ stacker news ~bitcoin

Bitcoin Loan VS Bitcoin-backed Loans: Pros & Cons

5723 sats \ 39 comments \ @mo 18 Apr 2023 bitcoin

As not a financial expert, I'm just curious about the precious opinions of all of you about the pros and cons of bitcoin loans vs bitcoin-backed loans.

How do you think will help lender better trust borrowers without going to the traditional credit-check/score?
Why lending bitcoin will be better/worse than lending fiat against bitcoin collateral?
Which solution you see to have a better financial inclusion?
Where do you see this financial products provide the most value?

Any further comment will be much appreciated to learn more about this topic

Thanks in advance

view all related items

1373 sats \ 3 replies \ @lightcoin 18 Apr 2023

Lending/borrowing BTC is only really useful for explicitly shorting BTC as in margin trading. It is otherwise too risky to borrow BTC, your loan could end up costing way more than a loan denominated in a less volatile asset. For example, imagine borrowing 1 BTC in March 2020 and expecting to pay back the loan by the end of the year... you'd receive $4000 in value at the time of the loan and by the end of the year have to pay back over $50,000 in value. Not a very good deal for the borrower.

Loans collateralized by BTC give borrowers the ability to unlock the value of their BTC without having to sell. Because the loans are over-collateralized, they can have lower interest rates than unsecured credit. It does of course require the borrower to already have assets in the form of BTC, so would not be appropriate for people who have very little in savings. But for people who hold BTC and want to access some of that value without having to sell, and are willing to maintain a sufficient collateral ratio to avoid liquidation, I think it is a good option.

There is a platform called Sovryn that offers both options, borrowing BTC, and borrowing using BTC as collateral: https://alpha.sovryn.app

You can look there and see the terms and interest rates and see what makes sense for your situation.

680 sats \ 2 replies \ @mo OP 18 Apr 2023

I not know Sovryn was allowing BTC lending/borrowing directly, I'll check it out. I knew about Lend.HodlHodl.com that is actually just playing as facilitator more than intermediary (I though is an interesting approach)

So in the case of lending/borrowing BTC directly... it will make sense to do it only for long terms contracts, like over 5 years?

63 sats \ 0 replies \ @lightcoin 18 Apr 2023

So in the case of lending/borrowing BTC directly... it will make sense to do it only for long terms contracts, like over 5 years?

I think moreso the opposite, it would only make sense on very short timescales. Long term we expect the BTC price to go up right? So we don't want to be short BTC long term. Even short term is risky haha but some people do make money shorting BTC.

0 sats \ 0 replies \ @super_testnet 18 Apr 2023

Hot take: hodlhodl's lending model is custodial

They use 2 of 3 multisig where you have a key, your counterparty has a key, and hodlhodl has a key

That means in all of these loans there is a group of 2 people (your counterparty + hodlhodl) who can pull the rug out from under you and run off with your money

They have the keys to your coins and can move them independently. You do not have the keys to your coins and cannot move them independently. That's precisely what custodial means: someone else has your money instead of you.

566 sats \ 22 replies \ @DarthCoin 18 Apr 2023

I was asked many times by many nocoiners about this aspect. I answer them here.

TLDR: Bitcoin is changing the mentality of consumerism into mentality of savings. Save today for having tomorrow enough to buy the stuff you really need it. Don’t stretch you legs more than your blanket.

Using your bitcoin as collateral is the most moronic thing ever. Literally you are going back to fiat and fractional reserve.

331 sats \ 21 replies \ @lightcoin 18 Apr 2023

Literally you are going back to fiat and fractional reserve.

BTC backed loans generally need to be overcollateralized which is not fractional reserve, it is even better than "full reserve".

413 sats \ 9 replies \ @nerd2ninja 18 Apr 2023

Full (unverifiable) reserve of Bitcoin, but not of dollars.

Leverage increases the prices of things until you pay off that leverage which brings the price back down. On a macro level, that means a depression unless you violate the social trust that made that work as money in the first place and increase the supply of money (which arguably the debt did in the first place) to bail out the lenders.

I'm simplifying a lot because I've gone over this again and again, but that's the gist.

332 sats \ 8 replies \ @lightcoin 18 Apr 2023

Maybe the CeFi lenders are unverifiable (hopefully more adopt Proof of Reserve and Proof of Liability) but those are not the only options. Here's a smart contract where you can see the full reserve, run a full node and verify yourself: https://explorer.rsk.co/address/0xf294ea272d6f8fedc08acf8e93ff50fe99e1f7e8

126 sats \ 7 replies \ @nerd2ninja 18 Apr 2023

You have addressed half of sentence 1 (failed to address fractional reserve of dollars) and did nothing about paragraph 2

63 sats \ 6 replies \ @lightcoin 18 Apr 2023

There's nothing really substantial to reply to. It's a narrative that is divorced from the actual mechanics of a BTC-backed loan.

221 sats \ 5 replies \ @nerd2ninja 18 Apr 2023

https://en.wikipedia.org/wiki/Systems_theory

"Systems theory is the interdisciplinary study of systems, i.e. cohesive groups of interrelated, interdependent components that can be natural or human-made. Every system has causal boundaries, is influenced by its context, defined by its structure, function and role, and expressed through its relations with other systems. A system is 'more than the sum of its parts' by expressing synergy or emergent behavior."

As such the system which acts as a heating element is not divorced from the system of a water boiler, it is part of the system.

The economic impacts of debt is not divorced from the mechanics of a Bitcoin backed loan. They work and operate in the same system.

You're being intellectually dishonest.

126 sats \ 4 replies \ @lightcoin 18 Apr 2023

I am not being intellectually dishonest. Your narrative is divorced from reality.

Leverage increases the prices of things until you pay off that leverage which brings the price back down.

Price is a function of supply and demand. Debt may increase demand for a particular good (giving people the ability to afford it who previously could not) but supply can react to keep prices down. There's no inherent reason to believe credit causes an imbalance that necessitates a dramatic price increase leading to recession after credit dries up. That said, suppliers don't have to blindly follow demand either, they can inquire about where demand is coming from, sense a debt bubble, and plan accordingly.

Credit is a perfectly normal part of the economy that supply chains can adjust to according to shifting consumer demands. Yes there is some "degen" speculative activity but it can be isolated, constrained by hard limits imposed by minimum collateral ratios, with failures managed through orderly liquidation and bankruptcy processes.

Where credit becomes really systemically problematic is when its price is artificially manipulated (for example due to govt subsidies or interest rate intervention), which sends all kinds of wrong signals to the market and leads to distortions such as malinvestment and oversupply or undersupply of goods and services.

On a macro level, that means a depression unless you violate the social trust that made that work as money in the first place and increase the supply of money (which arguably the debt did in the first place) to bail out the lenders.

If the loans are over-collateralized then there's no need to bail out lenders. If borrowers aren't maintaining sufficient margin, the collateral gets liquidated before it goes underwater, and lenders get their money back.

view replies

63 sats \ 10 replies \ @DarthCoin 18 Apr 2023

Why would I put my BTC as collateral to get shitcions? I just save BTC until I have enough to buy what I need. If I do not have it, so be it, I don't buy it.

331 sats \ 0 replies \ @lightcoin 18 Apr 2023

Why would I put my BTC as collateral to get shitcions?

You could borrow BTC or gold if you want, the medium of exchange matters less than the unit of account for denominating the debt.

That's a nice austere lifestyle you live, I'm close to debt free as well. But being able to leverage assets to cover short term unexpected expenses without having to sell those assets, or to multiply wealth through smart investments without having to sell existing assets, are real benefits that lots of people use collateralized debt for.

63 sats \ 8 replies \ @mo OP 18 Apr 2023

You'll put your bitcoin as collateral at 0%/12 month just to help others doing business or improve their life?

204 sats \ 7 replies \ @DarthCoin 18 Apr 2023

No. No collateral. Putting yourself in debt is not "improving your life", it is literally slavery. Live with what you have, can produce and sell. This is life.

0 sats \ 6 replies \ @mo OP 18 Apr 2023

Yes true, and I fully agree... what about no collateral? just direct lending of BTC for good?

0 sats \ 5 replies \ @DarthCoin 18 Apr 2023

No. I will never lend my BTC nor borrow from somebody else other money using my BTC as collateral.

0 sats \ 4 replies \ @mo OP 18 Apr 2023

Just curious now. How do you see poverty ending in the future? Which tools, apart to financial education, you see useful to remove slavery and have a bitcoin circular economy?

view replies

0 sats \ 1 reply \ @Darkbulb 19 Apr 2023

Dont lend your corn. Trust no one. Especially not Celcius Loans. I lost 1btc in a loan 🥲

10 sats \ 0 replies \ @dieselbaby 19 Apr 2023

Ouch, that sucks. The absolute scumfuckery that was going on with Celsius has seemingly managed to somewhat fly under the radar in relation to bigger, even more egregious scamming like the FTX debacle, though it certainly was in no way any less criminal. Alex Mashinsky (the CEO of Celsius) is a criminal who deserves to be in prison, I have no idea why he hasn't been arrested.

There's an abundance of evidence highlighting them doing all manner of illegal shit, including minting endless amounts of their own CEL shitcoin tokens, and using customer funds to purchase CEL at market prices to artificially pump the price of it, so that the CEO and other executives could cash out at a higher price. Basically ponzinomics on steroids, using customers' funds to pump their golden parachute bags. Totally disgusting.

I hope you're able to get back some of your funds, I haven't been closely following the happenings with Celsius but I would hope that there is at least some kind of legal avenue you can take for remuneration, even if it's unlikely and it takes a long time, better than nothing.

0 sats \ 4 replies \ @TheBTCManual 19 Apr 2023

I get the whole pitch of get capital without a credit score, but why would you need capital pulled from the future if your asset is appreciating and you have an income?

From my view, the real advantage of borrowing against your bitcoin is to extract liquidity without selling because you don't want to pay taxes and you have a confident assumption that you can pay back the fiat position. This situation exists because governments want to tax your investments and bitcoin isn't accepted on the merchant level everywhere, if you don't have that then the loan products unique selling point is gone.

If we are to move to a more bitcoinised world, it would be savings based and not debt based so I don't see how borrowing would be a big part of it, theres still room for equity investing for sure, owning pieces of companies

110 sats \ 3 replies \ @mo OP 19 Apr 2023

In a world where over 50% of the population still under the poverty levels, it’s important for a lot of people to find a way to get out of the shity hole. Doing credit is something that speed up the process and also risky for who, like many, has not financial education nor guidance to enter a journey like that. But as @DarthCoin mentioned, hard work and patience are probably the best tools everyone has and it’s free to use at any time, with no risk involved.

0 sats \ 2 replies \ @DarthCoin 19 Apr 2023

Those people are poor EXACTLY BECAUSE OF GOVS....

0 sats \ 1 reply \ @mo OP 19 Apr 2023

We got the point. Anything we can do from your wise perspective?

0 sats \ 0 replies \ @DarthCoin 19 Apr 2023

As I wrote on my substack (over 60 guides about Bitcoin and LN), here is a special one: https://darthcoin.substack.com/p/natural-law-and-bitcoin

0 sats \ 0 replies \ @doodlevaliumskies 19 Apr 2023

I beleive It allows the borrower to retain ownership of their bitcoin assets while still accessing traditional financial services such as loans. This can be especially useful for those who are long-term investors in bitcoin and want to avoid selling their assets during a downturn in the market, as they can use their bitcoin as collateral for a loan instead.....

0 sats \ 1 reply \ @TwoLargePizzas 18 Apr 2023

Imagine you live in a world where you have all of your wealth in BTC but you earn your income in fiat and still need to pay bills in fiat. You only have a few options.

Sell some BTC, incur a taxable event, pay the bills, pay the fiat tax bill.
Pay bills in fiat from your income, buy more BTC with whatever is left over.
Borrow against your BTC, no taxable event, pay the bills, repay the fiat loan.

Option 1 is the worst scenario. You don't want to sell your BTC and incur a tax event because now you have more bills and less BTC.

Option 2 is better, if you can manage your finances well, you might never need to borrow money to pay your bills. But it probably means you can't buy as much BTC as you'd like because you always need some fiat buffer for bills.

Option 3 is a nice to have. If you have a large unexpected bill you can pay it with borrowed money. No taxable event and you can repay the loan over time usually at a low interest rate. But it does carry extra risk, usually counterparty and margin calls.

Now imagine a different world where you have all your wealth in BTC and your income is in BTC and there's no taxable events for paying your bills in BTC. This is a very different world.

In this world, the lender is taking way more the risk than the borrower because of BTC's fixed supply. Fractional reserve is way more difficult since BTC can't be created out of thin air. In theory I can still lend out my BTC to someone else, but once it's lent it's no longer in my possession and I can't lend it again.

0 sats \ 0 replies \ @mo OP 19 Apr 2023

This last one you mention is the world/context I’ve placed my question within, where a borrower can borrow and return BTC. As you mentioned, it’s not an ideal scenario for the lender and that’s why is important for me to define other incentives that aren’t only focused on a %ROI … the journey continues with really little advancements

0 sats \ 0 replies \ @sea_monster 18 Apr 2023

It does make sense to use loans backed with collateral in some contexts. For example, in the US and Europe, selling bitcoin is a taxable event, while loans are not taxable. Some of my friends who have a lot of private equity and bitcoin use loans backed with collateral, which allows them to access cash without triggering a tax liability. Additionally, using collateral can help lower the interest rate on the loan and make it more affordable. While I personally did not grow up in an environment where making loans was viewed as a savvy thing, I can see how it can be a useful financial tool if used properly.

0 sats \ 0 replies \ @mo OP 18 Apr 2023

Thanks all for your responses. Conclusion: borrowing/lending is part of the obsolete fiat mindset and should be banned/avoided at any cost. Passionate hard work will always give more satisfaction and produce more value for you and for your community.