Bitcoin Borrowing Without Selling: A New Era of Collateralization

Bitcoin holders who need cash can borrow against their $BTC without selling it. This is made possible by wrapping or collateralizing their Bitcoin, which allows them to keep exposure to its price while using its value as collateral for a loan.

The process involves entrusting the Bitcoin to a custodian, a business that holds it for safekeeping, and receiving a digital token that can be used as collateral on another network. This token is meant to represent the original $BTC, and its holder keeps exposure to the same gains and losses.

However, there are risks involved. The borrower must pledge more value than they borrow because Bitcoin's price can fall while the loan remains outstanding. If the price falls too far, the buffer can become inadequate, and the lending application can liquidate collateral to reduce the debt.

Competition among providers such as Coinbase, Circle, and WBTC has led to different approaches in how useful these tokens are and how dependable the arrangements are when their holder wants the Bitcoin back. The commercial logic is straightforward: make the wrapper convenient for customers who already use the provider's services, then persuade other applications to accept it.