When most people think about Bitcoin, they may imagine volatile price charts, digital wallets, and tales of early adopters becoming millionaires overnight. But Bitcoin has progressed far beyond being just a speculative asset or alternative currency. Today, it’s also a financial tool that investors can leverage to tap real-world capital without liquidating any coins.
Enter Bitcoin loans: a growing trend gaining popularity that allows crypto owners to borrow against their crypto holdings. This means turning Bitcoin into cash without creating taxable events, bypassing long-term gains, or going through traditional credit approval hurdles.
What Are Bitcoin Loans?
A Bitcoin loan allows you to borrow cash, often in USD or stablecoins, using your Bitcoin as collateral. The lending platform you are borrowing from securely holds your cryptocurrency and provides you with a loan based on the market value of your holdings. This is usually anywhere from 30% to 70% of the loan-to-value (LTV).
When you repay the loan, including any interest that may have accumulated during it, your Bitcoin is returned in its full amount. It’s a seamless way for someone to tap into the value of their assets.
Why You Should Consider a Bitcoin-Backed Loan?
While some have speculated that Bitcoin lending will continue to remain on the rise, and others believe that Bit bonds could even help finance government debt with low interest, there are several reasons why an individual might consider taking out a crypto-backed loan, like the ones offered by Figure.
You Remain Invested While Accessing Cash
Instead of selling Bitcoin to cover expenses or invest in a project, a person can borrow against it to keep their potential gains intact. This is useful for those who wish to maintain the amount of Bitcoin they have while still accessing the cash value of the coin.
There Are No Taxable Events
Those worried about potential taxable events related to their Bitcoin loans do not have to fear this. When you sell appreciated Bitcoin, you must pay capital gains taxes. A loan defers that action, thereby offering liquidity without triggering a tax bill in the process.
You Get Fast, Credit-Free Access
Since Bitcoin loans are collateralized, they usually don’t require credit checks or long approval processes to receive them. This makes them accessible to those with unconventional income streams or limited credit history.
What Are People Using Bitcoin Loans For?
Bitcoin loans are useful for people in all types of situations. Some ways people are using them:
- Home improvement projects
- Startup capital
- Real estate down payments
- Debt consolidation
- Bridge financing between asset sales
By utilizing a Bitcoin loan, you can manage capital across real-life situations without worrying about not having your Bitcoin returned once you pay off your loan.
Smart Borrowing Begins with Smart Planning
Like any financial product, it is essential to understand the risks of taking out a Bitcoin loan.
- Price swings in the volatile Bitcoin market could lead to margin calls if your loan-to-value (LTV) ratio becomes too high.
- Missed payments can lead to the liquidation of your collateral.
- Platform security and the loan provider’s reputation matter; you must ensure your Bitcoin is secure before you utilize it as loan collateral.
As with any financial plan, checking loan terms, repayment options, and fees is important before you lock into any agreement.
Bitcoin as a Financial Tool for a Digital World
Bitcoin loans reflect a shift in how people think about crypto and wealth as a whole. As adoption grows, these tools will likely become more refined, as well as more regulated and more widely available for those seeking them, especially as people learn to buy and sell on crypto exchanges.
Bitcoin loans not only offer flexibility and control of one’s liquid assets without giving up on their long-term vision, but can help people access cash in a manner that works more easily for them.