Michael Saylor Proposes Bitcoin-Backed Loans

Following the green light from the SEC for the options trading on BlackRock Bitcoin ETF, discussions regarding Bitcoin yields have sparked up once again. In a recent podcast debate, MicroStrategy Chairman Michael Saylor shared his opinion on Bitcoin’s role in the traditional banking system.

Michael Saylor Proposes Bitcoin-Backed Loans

In the recent debate on leverage, banking, and Bitcoin, prominent crypto figures Michael Saylor and Saifedean Ammous shared thoughts on the common synergies between Bitcoin and the traditional banking sector.

Saylor suggested that the too-big-to-fail US banks backed by the government can offer users USD loans against their Bitcoin holdings. He added that this would allow BTC holders to generate yield and live off their BTC without selling them. Additionally, they would also benefit from the BTC price appreciation coupled with the credit risk of major banks like JPMorgan, Citi, or Bank of America as an advantage.

Microstrategy is the biggest corporate holder of BTC currently. Last week, it conducted $1.01 billion in convertible notes debt offering to buy Bitcoins. Thus, with a large stash of 252,220 BTC, MicroStrategy can benefit majorly from Bitcoin yields.

Why Is It A Bad Idea?

However, in the podcast, Saifedean Ammous – the author of The Bitcoin Standard – has expressed skepticism over the viability of the Bitcoin yields. He said that models like this could lead to failures similar to the one we saw with Celsius or BlockFi. Besides, he also cautioned that such systems are unsustainable without a lender of last resort. Ammous believes people will eventually learn the risks of leveraging BTC in this manner.

Saifedean clearly points out that MicroStrategy’s model depends on the assumption that USD would never fail. But with the rising calls for de-dollarization and the BRICS payment systems in work, how long would USD dominate the global financial system?

Saif correctly exposes that the MSTR model is dependent upon the dollar not failing. But Saylor is right that it’s not going away in the short run. Mid-term? We’ll see.

— Bill Barhydt (@billbarX) September 24, 2024

In order to bridge this lending gap, Custodia Bank CEO Caitlin Long proposed that “lending BTC up to 1:1 leverage is fine. Lending above 1:1 leverage means the lender is insolvent, by definition”.

Conclusion

As the debate surrounding Bitcoin yields and the potential of Bitcoin-backed loans continues to unfold, it is crucial to consider the potential risks and limitations of such systems. While some may argue that this could be a game-changer for Bitcoin holders, others believe it is a recipe for disaster. As the cryptocurrency space continues to evolve, it is essential to approach such ideas with a critical and informed perspective.

FAQs

Q: What is Bitcoin-backed lending?

A: Bitcoin-backed lending is a concept where borrowers use their Bitcoin holdings as collateral to secure a loan from a lender, often in the form of fiat currency.

Q: How does Bitcoin-backed lending work?

A: The process typically involves a borrower depositing their Bitcoin into a designated account, which is then used to secure a loan. The borrower can then use the loaned funds to cover expenses or invest in other assets.

Q: Is Bitcoin-backed lending a new concept?

A: While the concept of using Bitcoin as collateral is not new, the idea of large-scale, institutionalized Bitcoin-backed lending is a relatively recent development.

Q: What are the benefits of Bitcoin-backed lending?

A: Bitcoin-backed lending offers the potential for borrowers to generate yield on their Bitcoin holdings, while also providing a new source of funding for lenders.

Q: What are the risks of Bitcoin-backed lending?

A: The risks associated with Bitcoin-backed lending include the potential for market fluctuations, credit risk, and liquidity risk, among others.