How Are Institutional Investors Using Crypto-Backed Loans to Optimize Treasury Management?
Blockchain technology has improved over the years, and cryptocurrency is finding its way into financial institutions. Investors are now using crypto-backed loans as a smart way to manage money. It’s a different way to handle finances in a more flexible manner while avoiding tax bills. Keep reading this article to find out why these loans work for them.
What are Crypto-Backed Loans?
Crypto-backed loans (bitcoin loans) are when a borrower uses digital assets, like Bitcoin and Ethereum, as collateral. Instead of selling them, you can access credit based on their current value. This allows investors to maintain their position in the market while using traditional currencies like USD and EUR.
How do Crypto Loans Work
Here are the steps to get a crypto-backed loan, like the ones Figure offers.
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Deposit Collateral
The first step is depositing the cryptocurrency amount to be used as collateral. Simply follow the steps provided by the website to transfer the tokens. The websites usually share a wallet ID for a quick transfer.
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Get a loan
The platform will offer a loan in fiat or stablecoins, based on the amount of cryptocurrency or digital asset deposited. Each lender has loan terms, but the value ranges from 50% to 90% of the collateral.
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Repayment
Fund the account to repay the loan based on the terms set by the platform. Note that each loan has its conditions agreed to before the transaction. Once the full payment has been made, the collateral will be returned.
What’s the role of crypto-backed loans in treasury optimization?
Institutional investors are using bitcoin loans as an essential tool in treasury management. It helps increase returns, optimize liquidity, and reduce opportunity costs. Here are some of the ways they benefit.
Cash Without Selling Crypto
Institutional investors often hold lots of cryptocurrencies. Sometimes, they need cash to pay for business expenses or invest in something new. With crypto-backed loans, they can borrow all the money they need without selling their digital tokens.
Proper Utilization of Assets
Cryptocurrency holders don’t want their crypto to sit around and do nothing. Instead, it should be doing something worthwhile. With crypto-backed loans, investors can get something that works for them. It’s like having two uses out of the same money.
Helps Reduce Risks
Crypto prices can go up and down without any notice. Institutional investors understand this and will always try to protect themselves. One option is to borrow money when the prices are high. If the value of the coin drops, they are protected because the loan was based on a higher price.
This strategy can help avoid significant losses in case of volatility. For instance, you can use the high value of a house to borrow money before its value falls. This helps to reduce the risks of wild crypto price changes.
Proper Money Management
Like businesses that need to monitor cash exchange, big investors ensure that money flows smoothly. Sometimes, payments might come in the future, but they need cash now. Instead of selling crypto investments, crypto lending can solve the current financial situation. This helps them keep their crypto and still get financial assistance.
Saves on Taxes
You must pay taxes on your profits, including capital gains tax, when you sell crypto. However, if you borrow money using crypto as collateral, you are not selling anything, so you don’t have to pay any taxes. Big investors understand this and use it to their full advantage.
Instead of using the cash in hand, they can buy crypto and get a loan without creating a taxable event. It is smart for them to use their assets without paying a huge chunk to the government.
Smart Money Tricks
Some investors use crypto-backed loans to make more money using advanced investment strategies. One example is arbitrage, where you borrow money and take advantage of slight price differences between markets. Another strategy traders use is leverage. This means they borrow money to increase the size of the investment.
For instance, if they deposit $100, they may borrow another $100 and invest $200. This can increase profits while helping them manage money better. However, note that it can also increase losses if the prices drop.
Keeps Investors Active in both Crypto and Fiat
Institutional investors must use special platforms to get crypto-backed loans. Some of these websites, like BlockFi and Nexo, are centralized, meaning a company runs them. Others, like Aave and MakerDAO, are decentralized and run on computer code and smart contracts.
These platforms let investors deposit fiat, buy crypto, and get loans. The primary function of the platform is to hold crypto as collateral and ensure that all loan rules are followed. Using such tools helps manage money better in crypto and fiat currencies.
What Does the Future Hold for Crypto-Backed Loans?
As of August 2024, about $8.5 billion had been borrowed using Bitcoin as collateral. This number could rise to $45 billion by 2030 as more investors and companies adopt crypto in finance. The introduction of digital tokens representing real-world assets is another reason crypto loans are expected to rise.
Institutions will use traditional and crypto finance to reach a broader customer base. They may use digital coins as security for loans, take part in Decentralized Finance, and use on-chain tools to manage cash effortlessly. Better regulation and improved technology will also make crypto-backed loans an essential tool in the future.