Bitcoin continues to blaze a trail in the crypto space.
And it just just took another step in its quest to become a respected asset class.
Plenty of folks remain unconvinced bitcoin is actual money. And some skeptics continue to call it a scam.
But based on the latest announcement by Coinbase—one of the largest regulated crypto exchanges in the world—it’s getting harder to doubt bitcoin’s status as a financial asset.
In short, it sure acts a lot like money. And it continues to expand into areas previously reserved for “traditional” financial assets.
Today, I explain why this move by Coinbase is a win-win for exchanges and investors.
A couple of weeks ago, Coinbase announced it would allow customers to borrow U.S. dollars using bitcoin as collateral. Customers who own bitcoin can borrow cash up to 30% of the value of the bitcoin holdings in their Coinbase account.
This is a valuable feature for any bitcoin owner who needs cash for any reason. Instead of having to sell their crypto holdings for U.S. dollars, they can simply borrow the cash they need. The loan is secured by their bitcoin, which acts as collateral.
Collateralized loans aren’t anything new. As most readers probably know, borrowing money is a basic service in the financial industry. Most banks and similar institutions are happy to issue credit backed by a person’s assets, whether it’s their house or a portfolio of stocks.
This is a huge move in securing bitcoin’s status as a legitimate and valuable financial asset.
In many cases, taking out a small loan can be a better option than simply selling assets for cash. When you sell an asset, you incur a capital loss or gain. That’s a taxable transaction. And selling an asset also brings opportunity cost into play. Most bitcoin owners are long-term holders; they don’t want to risk missing out on the gains if bitcoin moves higher.
Coinbase offered more details about the program in a blog post last month. It said, “We hear from customers that they need cash for expenses like home renovations or car repairs, but they do not want to prematurely sell their crypto, or take out high-interest loans that could come with 20%+ APR.”
Customers across 13 states can join a waitlist to participate in the new program, which will start within a couple of months. Participants will be able to borrow up to 30% of their bitcoin holdings, up to $20,000. Coinbase will charge 8% interest on 1-year loans. Borrowers will pay interest on a monthly basis and owe the principal (the borrowed amount) after 12 months.
While 8% isn’t a bargain, it’s a much better option than high-interest loans like credit cards, which often charge interest of over 20% per year.
The most important takeaway here is that bitcoin continues to push into the same “use cases” as other financial assets. The more companies that follow Coinbase’s example, the more established bitcoin will become.
Keep in mind—bitcoin is already accepted as payment by businesses all over the world, including major companies like Microsoft, Overstock.com, Starbucks, and more. It seems like, each day, we see new individuals, brokerages, institutions, and hedge funds coming around to owning or trading this new asset class.
If you’re long bitcoin and need cash, you should check out the new Coinbase program. It will give customers the flexibility to keep ownership of their bitcoin while addressing their cash needs.
And on the exchange side, companies like Coinbase will benefit from the revenue stream created by customers’ interest payments. It’s a win-win for the entire crypto space.
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