As Price Rises, Bitcoin Demonstrates Value In Collateral Market

Copper bitcoin coins against a blue background
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By Landon Manning

With all of the attention that bitcoin has been receiving for its massive price increases lately, the asset is finding growth in a variety of financial use cases. For instance, reports are showing that it has taken the collateral world by storm. 

According to a report created through a collaboration between Arcane Research and Bitstamp, the use of bitcoin as collateral in loans had nearly doubled from 2019 to the fourth quarter 2020, with some 420,000 bitcoin being used for this very purpose in 2020 alone. Claiming that bitcoin is “the most portable asset the world has ever seen,” the study has shown that a wide variety of loan types have all contributed to the traffic of bitcoin skyrocketing in the last several months. 

The study goes on to state that it is not merely bitcoin’s price rise that accounts for this growth in the collateral market, but rather, it is several important underpinnings that make up the very foundation of Bitcoin’s blockchain technology. With no counterparty or credit risk possible in Bitcoin’s trustless model, Arcane Research and Bitstamp noted that “Bitcoin can be transferred around the world, instantly, at almost no cost, any time of the day, and any day of the year, and with full finality. No other assets can match these properties today, making bitcoin the perfect collateral asset for the future.” 

This trend in loan collateral has not gone unnoticed worldwide. For example, February 28, 2021, before these two companies released their report, the South China Morning Post published its analysis of this phenomenon in Southeast Asia. With the U.S. dollar going through price fluctuations on the international currency market, a number of fintech and investment firms in Hong Kong and Singapore have been offering premium deals on using bitcoin as collateral for USD loans, according to the Post. As Richard Byrworth, CEO of the Singapore-based Digitex, told the paper, “If one sees the dollar value weakening against the bitcoin, that could be a better way to spend the fiat currency today than at a future date.”

Still, in the grand scheme of the international business of loans and collateral, bitcoin has only taken a miniscule piece of the pie so far. With some $20 trillion tied up in the collateral market, the $30 billion that Arcane Research and Bitstamp estimate bitcoin occupies is barely a dent in the total. And yet, they note, this number has been growing astronomically, and the fundamentals are there for it to keep on doing so. The researchers conclude that they expect bitcoin to jump up to $1 trillion in the collateral market alone, and that this might happen sooner than many people think.

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