Loan backed market pump?

[bbc.reporter]

I am not certain what the terms are for the bitcoin collaterized loans, however if it is allowed, what will stop the whales from using their bitcoins as collateral to loan the cash to use to pump bitcoin?

The skeptical me thinks this might be its real purpose.



Fidelity Digital Assets will allow its institutional customers to pledge Bitcoin as collateral against cash loans in a partnership with blockchain startup BlockFi.

The target is Bitcoin investors who want to turn their digital stash into cash without selling, and potential customers include hedge funds, crypto miners and over-the-counter trading desks, Jessop said.

Source https://www.bloomberg.com/news/articles/2020-12-09/fidelity-digital-to-hold-bitcoin-as-collateral-for-cash-loans

[jackg]

Other than the potential drop nothing would really stop them taking loans against their funds to get more...

It's the same with defi though, you could stake 1btc and get 0.66 back in cash to buy btc again and get 0.44 in cash, 0.29, 0.19, 0.12, 0.08, 0.05, 0.03, 0.02...

Your 1BTC gives 2.88BTC exposure... But this is all leverage is - although this would cost 0.26 at 9% for a year in interest. Much cheaper than most if not all leveraged options out there.

[adaseb]

It seems this is like 2017 again where people are buying crypto on their credit cards, lines of credit or mortgaging their house to buy BTC. Except this time its the institutions that are doing this. Isn't this similar to what MicroStrategy is trying to do. They want debt to buy more bitcoins, over $550M worth. I guess this is mostly due to the fact that the interest rates are low, inflation is high and everybody is dumping the dollar.

So its all fine and dandy until there is a massive correction. However I am pretty sure most instituions with debt can easily wait it out unlike the 2017 crypto investors who had 20% APR credit cards due and also huge capital gain taxes to pay. So I would say its overall bullish. Lots of bullish news this week but BTC still fails to break ATH. Not the signals I was hoping for.

[exstasie]

It seems this is like 2017 again where people are buying crypto on their credit cards, lines of credit or mortgaging their house to buy BTC. Except this time its the institutions that are doing this. Isn't this similar to what MicroStrategy is trying to do. They want debt to buy more bitcoins, over $550M worth. I guess this is mostly due to the fact that the interest rates are low, inflation is high and everybody is dumping the dollar.

What do you make of it, in terms of sentiment? Does Microstrategy's short term obsession with BTC, to the point where they are now raising debt to fund leveraged buys, not feel greedy to you?

Bulls like this who see zero downside ever, and have no cash left so they start buying on leverage.......they often get punished by the market.

I am not certain what the terms are for the bitcoin collaterized loans, however if it is allowed, what will stop the whales from using their bitcoins as collateral to loan the cash to use to pump bitcoin?

The skeptical me thinks this might be its real purpose.

It's the same as it ever was. I remember when Bitfinex blew up in popularity in 2013 with its margin trading platform and people said the same thing. Margin trading is commonplace in finance, no way around it.

[Fortify]

There are always going to be two types of investors - those who max out leverage and can lose everything once the market turns and there are those that invest without leverage who will take a hit when the market turns but will lose a lot less if they exit before it drops too far. I especially love the quote from Warren Buffett and it applies to this situation: "Only when the tide goes out do you discover who's been swimming naked." aka only in the bad times do you see who stretched too far.

[bbc.reporter]

Other than the potential drop nothing would really stop them taking loans against their funds to get more...

It's the same with defi though, you could stake 1btc and get 0.66 back in cash to buy btc again and get 0.44 in cash, 0.29, 0.19, 0.12, 0.08, 0.05, 0.03, 0.02...

Your 1BTC gives 2.88BTC exposure... But this is all leverage is - although this would cost 0.26 at 9% for a year in interest. Much cheaper than most if not all leveraged options out there.

Agreed. It appears that it is slowly being accepted to create bitcoin as something similar to ponzi schemes where investors put money in a hole of a black box and more money comes out from the other hole hehehe.

[adaseb]

Is it really greedy buying over $500M worth of Bitcoin on debt? Well it seems like it but if you think about it. What else is there to buy really?

Real Estate is a bubble in most places and lots of work to maintain and rent out.
Dollar is tanking every week with all the money printing
Gold doesn't seem to want to appreciate as much as stocks/bitcoin
Stocks are all overpriced with PE rates going forward 10 years.

Hence maybe he is buying bitcoin because there is really nothing left to buy.

[bbc.reporter]

@adaseb. Similar to what you mentioned, institutional investors are like the people of 2017 who applied for personal loans, mortgaged their houses and borrowed money where they can to buy bitcoin to strike while the iron is hot hehehe.

However, the difference is the institutions have their corporations to issue debt to gamble on the market. We might also be tricked to think that this is adoption.

[masterzino]

Because there is no point in doing it.

LTV (loan-to-value) is between 55%-65% on most platforms and then you have your loan+coin(s) liquidated. Plus it will be hard to pull off loans over 1M, at least it will raise an eyebrow or two.

[exstasie]

Is it really greedy buying over $500M worth of Bitcoin on debt? Well it seems like it but if you think about it. What else is there to buy really?

Real Estate is a bubble in most places and lots of work to maintain and rent out.
Dollar is tanking every week with all the money printing
Gold doesn't seem to want to appreciate as much as stocks/bitcoin
Stocks are all overpriced with PE rates going forward 10 years.

Hence maybe he is buying bitcoin because there is really nothing left to buy.

You're focusing on the question of whether to invest in BTC, which I agree is a fine decision. You didn't actually address the fact that they are investing by issuing debt which is convertible to cash or equity at maturation. I don't know what Microstrategy's balance sheet looks like, but that inherently involves significantly more risk than investing only cash reserves. This is essentially buying on leverage, and if the market doesn't perform as expected, they may eventually need to liquidate BTC to service their debt (margin maintenance) just like any margin trader does.

I think the CEO is being very brazen. I wonder how common shareholders feel about him directly diluting Class A shares with this move.

[jackg]

Agreed. It appears that it is slowly being accepted to create bitcoin as something similar to ponzi schemes where investors put money in a hole of a black box and more money comes out from the other hole hehehe.

This ignores something though...

I can sit with my bitcoin and always keep hold of those bitcoins. People who leverage their bitcoins to get triple risk or reward on those coins. Their ability to do it and makes a profit also relies on others to come along and start doing the same thing throughout the cycle...

[Febo]

I am not certain what the terms are for the bitcoin collaterized loans, however if it is allowed, what will stop the whales from using their bitcoins as collateral to loan the cash to use to pump bitcoin?

A price crash and them not having USD to pay off the debt so their collateralised Bitcoins will be taken away cheap. Speculation with something so volatile as Bitcoin is very dangerous thing.

[exstasie]

This ignores something though...

I can sit with my bitcoin and always keep hold of those bitcoins. People who leverage their bitcoins to get triple risk or reward on those coins. Their ability to do it and makes a profit also relies on others to come along and start doing the same thing throughout the cycle...

Exactly. I'm guessing Microstrategy will come out of this just fine, given that they're buying below $20K in an obvious bull market. There is still lots of upside for them. I'd be a lot more concerned about companies taking similar actions in the middle of a bubble, late next year for instance.

That said, $650 million is apparently massive for Microstrategy. Their 2019 year end balance sheet showed only $917 million in total assets. This move feels reckless for a public company. I'm beginning to get curious whether there could be grounds for lawsuits against the company if BTC and MSTR underperform.

The S&P 500 is down 1.5% from its local high. MSTR is down 23%....

[sunsilk]

A price crash and them not having USD to pay off the debt so their collateralised Bitcoins will be taken away cheap. Speculation with something so volatile as Bitcoin is very dangerous thing.

Just as what I think. They are leveraging their bitcoins and taking this much risk would put them into a fall if they're not prepared or well planned by doing this. Although I'm not hoping for that but what would be the whole market's reaction if that happens?

These institutions are somehow into FOMO due to the fact that they're missing the train. But they've realized that it's not that late. And with such offers of taking loans through collaterals of their BTC makes it easier for them to keep buying and taking profits if necessary. They just gonna repeat the cycle every inch moves of bitcoin's price.

[600watt]

I am not certain what the terms are for the bitcoin collaterized loans, however if it is allowed, what will stop the whales from using their bitcoins as collateral to loan the cash to use to pump bitcoin?

The skeptical me thinks this might be its real purpose.



Fidelity Digital Assets will allow its institutional customers to pledge Bitcoin as collateral against cash loans in a partnership with blockchain startup BlockFi.

The target is Bitcoin investors who want to turn their digital stash into cash without selling, and potential customers include hedge funds, crypto miners and over-the-counter trading desks, Jessop said.

Source https://www.bloomberg.com/news/articles/2020-12-09/fidelity-digital-to-hold-bitcoin-as-collateral-for-cash-loans

this is the trade of the decade and a speculative attack vs the USD.  the combination of dirt cheap money, money printer goes brrrrr, and nothing juicy left to invest in, will suck in billions of USD.
everyone and their grandma will be forced to do the same.

[Wind_FURY]

Agreed. It appears that it is slowly being accepted to create bitcoin as something similar to ponzi schemes where investors put money in a hole of a black box and more money comes out from the other hole hehehe.

Bitcoin, not the protocol, is like Gold, it's a "naturally occurring Ponzi", not a "deliberate Ponzi" that has a scammer behind it that manipulates its value. Its "value", like Gold, is simply the product of the market's demand and the supply available.

[sana54210]

Well, what would be the point of giving people loans if they end up buying bitcoins with it again, not that you can stop people after they got the loan, but there is really no reason why they should allow people to just give bitcoin and get cash to buy more bitcoin, that doesn't make sense.

Basically loan system could be cheated, for example let's say you have a close friend who you trust, or a family member or maybe just an in law, if there is a house in the family what you will do is, ownership of the house will change hands and one person will get a HUGE mortgage for it, which will be paid monthly for 10 years let's say, and in reality that money is still with you, nobody actually bought a house, it just changed ownership in family. You can use that money for something else to get a lot more money and mortgage rates are significantly better.

[DeathAngel]

We’ve smashed through the ATH today, I think it’s very likely that once we rise a bit more then all the average joe’s will start researching into bitcoin & putting their savings in or taking out loans.

Bitcoin is unique, everybody is going to want a piece of the pie.