- Loans may also be used to make purchases, another frequent use case.
- The borrower does not have to worry about the tax ramifications.
When you put up your bitcoins as collateral to a bank to get money in fiat currency like the US dollar, you’re effectively lending your bitcoins to the bank, which lends you money. If the price of bitcoin falls, the user may be compelled to raise their collateral, resulting in their account being liquidated if they do not.
First time Wall Street behemoth Goldman Sachs lends cash collateralized by bitcoin held by the borrower; a bank representative tells Bloomberg. In an email, she informed the publication that Goldman was interested in the transaction because of its structure and the availability of 24-hour risk management.
Advantages of the Situation
When the value of Bitcoin falls, many investors take advantage of the situation to expand their holdings. The customer decides to buy additional Bitcoin using credit rather than paying with their own money because they believe that Bitcoin’s decade-long price growth trend will continue. Loans may also be used to make purchases, another frequent use case. Additionally, the borrower does not have to worry about the tax ramifications of a BTC sale if they pay back the loan when it matures.
Bitcoin mining businesses, which generate income in BTC but must pay operational expenses in dollars or other currencies, are now turning to bitcoin-backed loans for funding. In the past, miners would sell some of their bitcoins to pay their bills, but in the last few years, significant players in the business have become fonder of taking out cash loans using their bitcoin holdings.
In other words, Goldman’s decision to go into the bitcoin-backed lending sector is a watershed event for the industry. However, the terms of the loan were not disclosed by Bloomberg.
