Despite the favorable news about digital assets from the new administration, the crypto ecosystem remains disconnected from the U.S. banking system. Even after the lifting of restrictions related to Operation Chokepoint 2.0, both institutions and individuals still face challenges accessing money markets as efficiently as traditional finance can.
This gap presents an opportunity for crypto-native entities to leverage their solid collateral for borrowing U.S. dollars (USD), resulting in asset-backed loans that could yield higher returns than expected.
With junk bond spreads being less than 300 basis points (bps) above U.S. Treasuries, BTC-backed loans could present higher yields with lower risk compared to investment-grade bonds. BlockFills estimates the fair value of BTC-backed loans to be 150-200 bps over USTs, while they are currently trading at 400-600 bps over USTs.
Over-collateralized BTC-backed loans may offer a significant opportunity for traditional finance institutions to engage with the crypto space in a similar way to past innovations like mortgages and junk bonds. These transactions can be structured through a Tri-Party arrangement, where a trusted third party manages the funds in escrow, eliminating the need for crypto custody and allowing seamless margin calls without needing to sell collateral upon defaults.
Crypto businesses currently experience limited access to the USD banking system, making BTC-backed loans a feasible solution to fill this gap. These loans have good, tradable, and liquid collateral in both onshore and offshore markets, especially when compared to traditional corporate loan bankruptcy proceedings that can last years.
While a portfolio of such loans doesn’t ensure diversification since all loans are backed by cryptocurrency, they can be hedged using the options market, which has also gained liquidity in both listed and OTC markets for BTC.
The BTC-backed loan sector represents a unique opportunity connecting crypto with traditional finance. Rather than yielding speculative returns as seen in outright positions, it aligns more with investment parameters familiar to seasoned investors, utilizing terms like “excess risk-adjusted return” and “harvesting premiums” that echo investment conversations from the 80s and 90s.
The insights provided are illustrative and should serve as guidance based on specific market conditions, without accounting for future changes or risks. It’s crucial to assess the information and make informed decisions aligned with personal financial goals.
