Bitcoin's New Role: Collateral Asset

Bitcoin is increasingly being used as collateral for loans and trading facilities, allowing holders to access cash or stablecoins without selling their underlying asset.

This development changes the risk profile of owning bitcoin, as a borrower who pledges R500,000 worth of bitcoin for a R150,000 loan begins with a loan-to-value ratio of 30%, but if the value of the bitcoin falls, the ratio rises to 50% or more.

Centralised platforms such as Kraken and Binance offer crypto-secured borrowing to eligible customers, while decentralised finance takes a different approach, using smart contracts to automate collateral ratios and liquidation processes.

Institutions are also moving into the market, combining crypto's continuous settlement with legal controls familiar to institutional lenders. However, rehypothecation, or the reuse of pledged bitcoin to secure other borrowing or trading activity, remains an unresolved issue.