Despite all the positive news about digital assets coming from the new administration, Crypto Ecosystem is still not fully integrated with the US banking system. Even with the removal of “Operation Chokepoint 2.0” limits, institutions and individuals are unable to access the money markets with the efficiency level that traditional Main Street, so much less Wall Street, is capable of.
This has created an opportunity for many Crypto-native devices to take advantage of what they have-good security and to use this security to borrow US dollars (USD). The result is an asset -supported loan that has the potential to give more than it “should.”
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With unwanted bond spread less than 300 basic points (BPS) over US Treasury, BTC-supported loans may offer more dividends than unwanted bonds with less risk than bonds in investment quality. Using current market conditions and a standard credit standard modeling technique, Blockfills estimates a fair value of 150-200 bps over USTS for BTC-supported loans, yet they are currently trading with 400-600 BPS over USTS.
Overcollateralized BTC-supported loans can provide a great opportunity for traditional financing institutions participating in crypto in scale, in a way reminiscent of previous innovations such as mortgage loans and unwanted bonds. These transactions can be structured in a tri-party event, which is when two parties engage a third party as a trusted custodian for funds held in Escrow. This removes the need to deteriorate crypto, handle margin calls and deal with selling the collateral under standard conditions.
Crypto market participants and businesses simply do not have full access to the USD banking system. These BTC-supported loans are a possible solution to fill the gap. Security is good, marketable and fluid in both markets on and offshore. This is positively compared with standard terms of corporate loans where bankruptcy proceedings can last for years (or decades).
A portfolio of such loans does not represent diversification as all these loans would be supported by cryptocurrency. However, this means that a portfolio can be uncovered using the market for opportunities*, which has also become liquid in both listed and OTC markets for BTC.
The BTC-backed loan market is an option that bridges crypto and traditional financing. It is not intended to provide the kind of “degener” returns that may be available in direct positions, but instead speaks to the kind of investment parameters that come with vocabulary recognized for Patagonia West-Wearing audience. Expressions such as “excess risk -adjusted return” and “harvest prizes” are reminiscent of the 80s and 90s.
Written by Ari Pine, Co-chief of exotic derivatives* products at Blockfills, a trading and market technology company.
The above levels are indicative and serve only as general guidance or potential scenarios based on certain market conditions. They do not account for future market movements, execution risks or other dynamic factors. Always remember to assess the information, complete your own analysis and make decisions that are in line with your financial goals and risk tolerance.
*Derivative products that are only available for qualified counterparties. For US persons, the client is an eligible contractor (“ECP”) as defined in § 1A (18) of the Commodity Exchange Act and related guidance. Non-American persons must qualify as an eligible professional client. Blockfills only supplies services to customers residing in the UK that fall within an exemption available under the British economic promotion regime (investment people, individuals with high net worth, high -net companies, non -incorporation -ink corporate associations, etc. Certified sophisticated investors ).
