It was recently revealed that Coinbase would soon introduce collateral-based loans taken out against Bitcoin holdings in exchange for instant cash.
The product is a great move by the crypto exchange, allowing it to compete against BlockFi and others in the lending space. But it also may have a side effect that promotes Bitcoin holders to keep on holding for the long term. Here’s why.
Coinbase To Offer Collateral-Based Loans On Crypto
Cryptocurrencies emerged due to Bitcoin’s creation and the rise of alternative forms of digital finance. And what started out as just one cryptocurrency designed to act as the first all-digital form of peer-to-peer cash, was born into an entirely new industry.
Crypto assets now come in all sorts of different types and forms, and which has brought about a new dawn of decentralized finance. DeFi isn’t just a buzz word. Although it is certainly red hot right now, perhaps overly so, but it is a true, sustainable trend building real-world value.
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The recent DeFi craze has put the spotlight on crypto-based lending. Assets like Compound allow crypto token holders to lend out their assets for an APY return.
Some companies also allow users to take loans out against their own crypto assets for quick cash.
Popular San Francisco-base Coinbase, will soon be one of those companies, according to a recent announcement. Coinbase revealed they will be offering their customers the ability to borrow as much as 30% of their BTC holdings, up to $20,000 at a rate of 8%.
Holders are only required to make monthly payments on interest, leaving principle up to them to decide when to tackle. After all, it is your own assets you are borrowing against.
This is an enormous benefit for customers, but it also could ultimately be a major boost for Bitcoin.
BTCUSD New Uptrend On the Way? | Source: TradingView
Why Holders Will Be Less Apt To Cash Out Bitcoin Thanks To Collateral Loans
Everyone has been through tough times and needed some cash faster than a paycheck would provide. Banks offer personal loans, credit cards have cash advances, or you could cash out some assets by pawning your gold or exchanging some Bitcoin for USD.
Moving forward, in those unfortunate events, crypto holders will be less apt to cash out their Bitcoin, and could instead consider taking a loan out on their holdings. This would allow the crypto investor to potentially pay off the loan itself with any price increase in the asset.
This sort of phenomenon taking place in an incredibly scarce asset supply-wise could have a dramatic impact on prices, helping to remove one reason for selling Bitcoin from the overall equation.
What will remain, are investors who sell the asset simply to take profit, which data suggest is slowing by the day with holders expecting higher valuations in the months ahead.
On the negative side, there will always be a subset of holders that abuse this being at their disposal, and will likely result in loans being taken out against Bitcoin, solely to buy more Bitcoin.
Such a strategy could work out in someone’s favor due to the asset being close to a new uptrend. However, it could ultimately backfire and cause a lot of issues. Like any loan, it will be up to the party involved to stay responsible and pay down their loan. But even this irresponsible and risky strategy would also boost Bitcoin by taking more supply out of the market amidst the growing demand.