Bitcoin is a popular term. But only a few people understand it well. For starters, Bitcoin is a decentralized peer-to-peer digital currency. And this means you can use it in place of your conventional fiat money, such as the US dollar, to pay for goods or services. But you can only do so in platforms that accept Bitcoin payments. For example, you can trade in Bitcoin and other cryptocurrencies through the Bitcoin Pro trading platform.
Besides being a popular digital currency, Bitcoin is also an attractive asset. You can invest in Bitcoin as a short-term or long-term investment.
Moreover, you can use Bitcoin as collateral for loans. As collateral, Bitcoin helps you access loans in the form of stablecoins, which you can also convert to conventional currencies like the USD. But you need to understand how this works.
How to Use Bitcoin as Collateral
Bitcoin can be collateral for a loan through FinTech or crypto exchange platforms. What you do is first sign up and open an account on the platform of your choice. After your account is approved, then you deposit Bitcoin into it. Usually, you will transfer Bitcoin from your Bitcoin wallet to this new borrowing account.
Ideally, Bitcoin applies the concept of over-collateralization. Thus, you will deposit Bitcoin worth more than the amount you intend to borrow. For example, if you put Bitcoin worth $20,000, you can only borrow an amount that is less than that. You can borrow $5,000, $10,000, or even $15,000.
Over-collateralization aims to mitigate the risk of Bitcoin’sBitcoin’s value dropping. Bitcoin is highly volatile. If, after borrowing, the value drops significantly to almost the amount you put up as collateral, you will be alerted with a margin call. The platform liquidates the collateral if the worth reaches a certain level, almost the same as the amount you placed. However, there are several reasons to use Bitcoin as collateral for a loan. Here are some of them.
Easy Acess to Loan
You can quickly access a loan if you use Bitcoin as collateral. The lender will approve if the loan is within the set threshold. That’sThat’s because Bitcoin lending does not apply the stringent credit rules standard in the traditional financial system. For example, your credit rating does not matter.
You Pay Less Tax
In the US, you should pay tax on Bitcoin as long as you use it. If you trade or use Bitcoin to make a payment, you generate a taxable event that will reflect on your tax bill. However, using Bitcoin as collateral means you can still borrow against it without being taxed.
Greater Flexibility
You can decide to take a business loan using your Bitcoin collateral. But you can also take a loan on the same collateral and use it to clear your expenses. For example, you can a loan against your Bitcoin collateral and convert it to US dollars which you can use to cater for your expenses such as paying house rent.
Security
Even if the value of Bitcoin drops below the amount of your collateral, you will not have to repay the loan. Generally, after receiving the margin call from your crypto exchange platform, you don’t have to worry that you will lose everything.
Final Thoughts
Bitcoin provides unique opportunities for you, including using it as collateral for loans. There are certain benefits to doing this. But also take note of the risks.
