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Foreword

Drawing on years in traditional finance, Bitcoin markets, and portfolio management, this paper on bitcoin lending reflects firsthand experience rather than purely academic theory. It is written in my role as Bitcoin Strategy Advisor at Blockrise, together with a co-writer who serves as Portfolio Manager at the firm.

The analysis is informed by risks witnessed in the early era of Bitcoin-backed lending, when market structures were fragile and standards were immature. However, the lessons from those years now provide a foundation for a more robust credit market built around digital collateral.

My aim is twofold. First, I want lenders and borrowers to understand which risks emerged, which remain, and where the structural opportunity lies. Second, I seek to offer a framework for responsible participation in a market that can be transformative if approached with discipline.

There is a popular narrative in the Bitcoin community: “With Bitcoin-backed lending, you never have to sell your Bitcoin.” That sounds empowering. Yet it sits close to another reality: leverage creates forced sellers. The difference between freedom and ruin depends entirely on how structures are designed.

History shows this pattern is not unique to any asset class. The 1929 crash, the dot-com bubble, and the 2008 mortgage crisis all revealed how leverage that appears manageable in good times becomes catastrophic under stress. Moreover, seemingly safe instruments can devastate households and institutions when markets reverse.

Bitcoin-backed credit products are no exception. The asset is new, but the mechanics of risk are as old as finance itself. That said, understanding those mechanics allows investors to harness the upside while containing the downside.

This paper therefore sets out where opportunity exists for lenders and borrowers, how to value Bitcoin as collateral, which hurdles still limit mainstream adoption, and what can go wrong if structures are poorly designed. It also outlines how to prevent repeat failures.

We do not need to fear this market; we need to understand it. With understanding comes the ability to participate responsibly in what may become one of the most significant developments in modern credit markets.

, January 2026

The opportunity gap in Bitcoin-backed credit

The global fixed-income universe totals around $130 trillion in assets under management, spread across government bonds, corporate debt, mortgage-backed securities, and other credit instruments. These securities form the backbone of institutional portfolios worldwide.

By contrast, the Bitcoin-backed lending market in 2025 reached just $74 billion in total volume.1 Roughly $24 billion sits in centralized finance (CeFi), where regulated platforms lend to verified borrowers, while about $50 billion is deployed through decentralized finance (DeFi) protocols on public blockchains.

The CeFi segment represents the true institutional gateway. These platforms offer compliance frameworks, institutional-grade custody, and risk management practices that can be evaluated using traditional due diligence. Yet, even here, the scale remains modest relative to global credit.

A simple thought experiment illustrates the gap. A 1% allocation from the global fixed-income market into institutional Bitcoin-backed loans would amount to 54 times the current CeFi market. Moreover, this is not a speculative forecast, but a measure of the structural headroom if digital collateral is treated on par with other assets.

Two major blockers to broader adoption

Despite the clear opportunity, institutional adoption is constrained by two primary forces: regulatory capital rules and philosophical risk frameworks.

1. Regulatory barriers in banking

Under Basel III/IV, Bitcoin exposures receive a punitive 1,250% risk weight.2 In practical terms, if a bank wants to hold €1 million in loans collateralized by Bitcoin on its balance sheet, it must allocate €1 million in capital against that exposure.

By comparison, a standard residential mortgage requires only €22,400 in capital for the same €1 million exposure. This divergence makes holding loans secured by Bitcoin collateral economically unattractive for regulated banks and effectively blocks large-scale participation. Appendix A presents the exact capital calculations.

However, family offices, private debt funds, and other non-bank lenders are not bound to these Basel rules. They can evaluate Bitcoin on economic and technological merits instead of regulatory labels, and they are increasingly filling the gap left by traditional banks.

2. Philosophical risk assessment across all actors

Conventional credit models were built around assets with stable cashflows (rental income, coupons), decades of price history, and heavy legal anchoring such as land registries. Bitcoin fits none of these categories, so it scores poorly when judged solely through this lens.

This philosophical hurdle affects everyone, including sophisticated non-bank lenders. Overcoming it requires a new framework that values transparency, programmability, instant global liquidity, and digital verifiability. Chapter 6 explores this change in perspective in depth.

The thesis: from question of legitimacy to question of speed

The central debate is no longer whether Bitcoin qualifies as bank-grade collateral. Institutional moves in 2025 by JPMorgan, Goldman Sachs, Cantor Fitzgerald, and others have validated market demand.

In October 2025, Strategy (formerly MicroStrategy) received a B- issuer credit rating with a stable outlook from S&P Global, becoming the first Bitcoin-focused company to obtain such a rating.3 This was based on conventional metrics like balance sheet strength, cashflow, and risk profile.

The question now is how quickly institutional frameworks will evolve to recognize what markets have already priced in. This paper offers analysis, evidence, and a practical framework intended to accelerate that process for both lenders and borrowers.

In terms of scope, Chapter 2 dissects market drivers and upside potential, supported by scenario analysis in Appendix B. Chapter 3 reviews risks and historic failures. Chapter 4 defines the gold standard of prudent practices, with LTV calculations in Appendix C. Chapter 5 examines Bitcoin’s unique properties as collateral, backed by monetary data in Appendix D. Chapter 6 compares digital collateral with traditional assets from two different analytical perspectives. Chapter 7 outlines emerging products and the forward-looking opportunity set.

The explosion of Bitcoin-backed lending and its upside

The recent expansion of Bitcoin-secured credit is underpinned by five powerful drivers. Together they explain why this niche is quickly evolving from a retail product to an institutional asset class.

1. No sale, no tax

In many jurisdictions, selling Bitcoin triggers capital gains tax when gains are realized. An investor who bought at $10,000 and sells at $100,000 may owe tax on the $90,000 gain, depending on residency and holding period.

By borrowing against holdings instead of selling, investors can defer these tax obligations indefinitely while still accessing liquidity. Moreover, for long-term holders with large unrealized gains, the compounding benefit of deferral can be substantial. Borrowers must, of course, confirm applicable tax treatment with local advisors before implementing any strategy.

2. Liquidity without sacrificing exposure

Companies and high-net-worth individuals frequently need capital for expansion, real estate purchases, strategic investments, or cashflow management. Collateralized borrowing allows them to access fiat or stablecoins while maintaining exposure to Bitcoin.

In this structure, the asset base remains intact, while only liquidity moves. For investors with a strong conviction in Bitcoin’s long-term appreciation, this approach preserves upside potential while solving near-term funding needs.

3. Save in scarcity, spend in inflation

Bitcoin is the only asset with programmed absolute scarcity. Its supply is capped at 21 million coins, enforced by open-source code and validated by thousands of nodes worldwide. In contrast, fiat currencies like the US Dollar can be expanded at will by central banks.

US Dollar M2 money supply has grown by roughly 6-7% annually in recent years, a figure documented in Appendix D. By borrowing fiat against digital collateral, investors effectively finance spending in a depreciating currency while holding a scarce asset. This is a form of monetary arbitrage, although the outcome depends entirely on Bitcoin’s realized performance.

4. Institutional validation and product build-out

Strategy’s B- rating from S&P Global in October 2025 was a watershed moment, confirming that a balance sheet anchored in Bitcoin can meet traditional credit metrics.3 This was followed by moves from JPMorgan, Goldman Sachs, Cantor Fitzgerald, Tether, and Morgan Stanley, all of which launched or expanded credit products linked to Bitcoin.

Meanwhile, Bitcoin ETFs have surpassed $110 billion in assets under management.9 Such institutions do not enter new markets casually; cross-functional risk, legal, and compliance teams typically analyze for years before approval. Their participation signals that Bitcoin has passed multiple internal due diligence thresholds.

5. Asymmetric upside via conservative LTV

At a 30% loan-to-value (LTV) ratio, borrowers unlock liquidity while keeping significant upside exposure. If the asset appreciates, the loan shrinks relative to collateral value. For example, if price doubles, a 30% LTV effectively becomes 15%.

In many cases, borrowers roll loans at maturity rather than fully repaying them. Scenario analysis in Appendix B demonstrates how this asymmetry can benefit borrowers under various growth assumptions, including conservative and bearish paths.

Scenario analysis: five-year outcomes

The scenarios below compare a five-year Bitcoin-backed loan with an immediate sale alternative. The analysis assumes a 30% initial LTV, a $100,000 starting price, and an 8% interest rate compounded annually.

Key parameters include a $30,000 loan, 5-year horizon, and a direct-sale benchmark of selling 0.30 BTC immediately for the same liquidity. Table 1 in the original paper summarizes these inputs.

Table 2 then models four paths: Bear Case, Conservative (+15% CAGR), Realistic (+30% CAGR), and Historical (+60% CAGR). Outcomes are expressed in terms of Bitcoin needed to repay the loan, remaining holdings, and the difference versus just selling 0.30 BTC upfront.

In the Conservative scenario, the price reaches $201,135. The outstanding loan of $44,080 is repaid with 0.219 BTC, leaving 0.781 BTC versus 0.70 BTC in the direct-sale case; a net gain of 0.081 BTC. In the Historical path, the final balance is 0.958 BTC, or 0.258 BTC more than the sale alternative.

The Bear Case, however, shows the opposite. After a harsh sequence (+15%, then -60%, then modest recovery), the borrower ends with just 0.370 BTC, which is 0.330 BTC less than if they had sold 0.30 BTC at the outset. This underscores that leverage amplifies both gains and losses.

Bear case and the central role of LTV management

The Bear Case also highlights how timing of drawdowns interacts with LTV. In this path, the price collapses to $46,000 at the end of year 2, pushing LTV to 76% and triggering a margin call.

The borrower then faces two options to restore a healthy 60% LTV: add $12,320 of new collateral (about 0.27 BTC at crash prices) or repay $7,392 of principal. Importantly, if liquidation is avoided at this stage, the loan can later be refinanced.

By year 5, the price recovers to $69,960, with the loan balance at $44,079 and LTV at 63%. This is well within the range of acceptable levels for rolling the facility. Time is on the borrower’s side only if they remain above liquidation thresholds.

Figure 1 in the original paper visualizes this dynamic, with the Bitcoin price shown against LTV. The graph illustrates that margin calls are early-warning mechanisms. That said, if borrowers fail to act, forced liquidation is triggered above 85% LTV.

This is why LTV management is the core discipline in collateralized Bitcoin finance. Forced selling is disastrous for borrowers and suboptimal for lenders, as both are pushed to transact at market lows. Conservative starting LTVs, continuous monitoring, and pre-planned capital buffers are essential to avoid this outcome.

Risks of Bitcoin-backed loans and historical context

Before focusing on asset-specific risks, it is vital to understand that forced liquidation due to excessive leverage is a recurring theme in financial history. The pattern predates digital assets by centuries.

Table 4 in the paper surveys events from Tulip Mania (1637) through the South Sea Bubble (1720), the Wall Street Crash (1929), Black Monday (1987), the Subprime Crisis (2008), and the Crypto Winter (2022). In each case, high leverage combined with sudden market stress led to mass liquidations and wealth destruction.

In 2022 specifically, numerous platforms operated at 80-90% LTV and layered rehypothecation on top. When prices crashed, firms like Celsius, FTX, Three Arrows Capital, and Genesis collapsed, wiping out more than $15 billion in customer assets.

The critical point is that the core risk was not the nature of the collateral, but the leverage and opaque practices built around it. Forced liquidation at the bottom of the cycle is the most destructive possible outcome for all parties.

Evolution of the Bitcoin lending market (2014-2025)

The market has undergone a rapid evolution, moving from experimental pilots to professional infrastructure. Understanding this trajectory explains both the 2022 failures and the more conservative standards that followed.

From 2014 to 2016, early platforms such as Nebeus and SALT Lending, plus margin products at exchanges like Bitfinex, proved the basic concept: loans secured by Bitcoin could function. However, structures were rudimentary and largely unregulated.

Between 2017 and 2021, the sector entered a “Wild Growth” phase. Firms including BlockFi, Celsius, Nexo, and DeFi protocols like Aave and Compound pushed aggressive terms, offering 70-90% LTV and double-digit yields of 10-20%. Moreover, customer assets were often rehypothecated without adequate disclosure.

The inevitable crash came in 2022. With platforms such as Celsius, BlockFi, FTX, and 3AC going bankrupt, more than $15 billion in user assets were liquidated. Crucially, Bitcoin itself did not fail; the protocol continued to process blocks and transactions without interruption.

From 2023 to 2024, the market entered a “Professionalization” phase. Surviving platforms shifted to 30-50% LTV ranges, implemented Proof-of-Reserves, removed or strictly limited rehypothecation, and adopted multisignature custody. Only conservative and transparent operators remained viable.

By 2024-2025, the sector began to institutionalize. The EU’s MiCAR framework went live, the US SEC provided greater clarity on Bitcoin’s classification, Strategy secured its S&P rating, and global banks like JPMorgan, Goldman Sachs, and Cantor Fitzgerald launched products. Bitcoin now functions as institutional-grade collateral for selected use cases.

The overarching lesson is clear: the 2022 crisis was a failure of lending practices, not a failure of the Bitcoin network. Sound structures with conservative leverage, transparent reserves, and user-controlled keys survived; overextended, opaque platforms did not.

The gold standard for prudent Bitcoin-backed lending

From these failures and successes, a set of best practices has emerged. These are not arbitrary regulatory rules, but practical survival standards derived from real-world stress tests.

Table 6 defines five pillars: custody design, LTV policy, transparency, liquidation process, and rehypothecation. Platforms that respect these pillars have, so far, shown resilience. Those that ignore them reintroduce the same vulnerabilities that drove past collapses.

Custody and key control

Under the gold standard, borrowers hold one key in a 2-of-3 multisig setup, while the platform and an independent custodian each hold one additional key. No single party can move funds unilaterally, and the borrower retains meaningful control.

Historical practice often relied on platform-only custody, sometimes with large amounts stored in hot wallets. This centralization proved catastrophic in 2022 when several platforms became insolvent and users lost access to their coins.

LTV policy and alerts

Conservative structures cap starting LTV at 30% and provide real-time alerts as the ratio drifts upward. This buffer allows the position to survive a 65% price decline before hitting the 85% liquidation threshold.

By contrast, pre-2022 platforms routinely permitted 50% or higher LTV at origination and provided only delayed or inadequate warnings. This left borrowers with little time to respond when volatility surged.

Transparency and rehypothecation

Modern platforms publish 24/7 Proof-of-Reserves data, allowing depositors and auditors to verify that collateral exists and aligns with liabilities. Because Bitcoin’s ledger is public, such proofs can be independently checked.

In the old model, platforms provided partial or no disclosure. Assets were often lent out to third parties, producing hidden counterparty risk. The gold standard demands either no rehypothecation or explicit, opt-in consent from clients.

Fair liquidation mechanics

Under best practice, any liquidation event requires 2-of-3 multisig consensus rather than unilateral platform action. This ensures that no single party can trigger a forced sale without oversight and documentation.

This structure creates a more orderly process during stress, allowing borrowers to understand and, where possible, contest or remediate positions before collateral is sold.

LTV zones and risk classification

The relationship between starting LTV and liquidation risk is mechanical. Table 7 in the source document divides the spectrum into six zones: Gold Standard (0-30%), Conservative (30-50%), Moderate (50-60%), Elevated (60-75%), Critical (75-85%), and Liquidation (>85%).

Each zone implies a different operational posture. Optimal positions can withstand deep drawdowns with limited monitoring. Elevated and Critical zones demand immediate attention, additional capital, or partial repayments. Liquidation above 85% represents the point where lenders must sell to protect principal.

The mathematics of drop tolerance

Drop tolerance, the price decline before liquidation, is calculated as:

Drop Tolerance = 1 – (Starting LTV ÷ Liquidation LTV)

For a 30% starting LTV and an 85% liquidation threshold, the calculation is 1 – (0.30 ÷ 0.85) = 64.7%. In other words, the price can fall nearly 65% before forced sale is triggered.

Figure 2 visualizes how different starting LTVs generate different buffers. Historical drawdowns of Bitcoin are severe, but most of them unfold over months rather than hours, providing time for margin calls and remedial actions when structures are conservative.

Unique properties and considerations of Bitcoin as collateral

Bitcoin differs fundamentally from assets like property, equities, or bonds. Understanding these differences is essential for any institutional credit framework built around digital collateral.

Foundations: what Bitcoin is and why scarcity matters

Bitcoin is a digital bearer asset that exists on a decentralized peer-to-peer network. It is not issued by any central bank or corporation. Instead, its rules are enforced by software running on thousands of independent machines, and all transactions are recorded on a public blockchain.

The core innovation is provable digital scarcity. Before Bitcoin, digital files could be copied indefinitely. Bitcoin’s design ensures that each coin is unique and cannot be spent twice. This scarcity is enforced by math and cryptography rather than institutional guarantees.

Credit risk: no issuer, no default

Traditional collateral assets often embed credit risk. Corporate bonds depend on issuers remaining solvent, and even real estate relies on tenant health and legal enforcement. If the issuer fails, the collateral’s value can collapse.

Bitcoin has no issuer and no central entity that can default. Its value is set by global supply and demand, rather than by any single organization’s balance sheet. When Lehman Brothers failed in 2008, previously investment-grade bonds plunged in value overnight.

In 2022, customers of platforms like Celsius and BlockFi lost access to their coins because companies misused deposits. The Bitcoin protocol itself continued running flawlessly. The risk lay with custodians and intermediaries, not with the underlying asset. When held in self-custody or robust multisig structures, Bitcoin eliminates this particular form of credit risk.

Liquidity risk: 24/7 markets and instant settlement

Real estate can take months to sell. Bond markets often seize up during crises. Even equities cannot be traded outside market hours. In stark contrast, Bitcoin trades continuously, every day of the year, across exchanges worldwide.

Daily volumes usually range between $20 billion and $80 billion. For lenders, this means positions can be monitored in real time and adjusted at any moment. During a sudden weekend drawdown, a lender can issue margin calls and liquidate collateral within minutes if required, rather than waiting for markets to reopen.

Operational risk: low-cost custody and perfect divisibility

Physical collateral such as gold and property requires ongoing security, insurance, and maintenance. These operational overheads can be significant over time.

Bitcoin, by contrast, can be secured on a hardware wallet costing under $100, especially when embedded in multisig arrangements described in Chapter 4. Moreover, each coin is divisible into 100 million satoshis, enabling precise loan sizes, partial liquidations, and micro-adjustments that are impossible with indivisible assets like buildings.

Inflation risk: fixed supply and halving schedule

Fiat currencies lose purchasing power as central banks expand supply, particularly during crises. As discussed, US Dollar M2 has grown at around 6-7% per year in recent periods, with 2020 seeing a much larger one-off expansion in response to COVID-19.

Bitcoin’s supply is capped at 21 million. Roughly 19.8 million coins have already been mined. New issuance declines according to a preset halving schedule. In April 2024, the block subsidy was cut in half again, reducing annual inflation to about 0.8%. After the 2028 halving, this will fall to roughly 0.4%.

Appendix D compares Bitcoin’s emission profile with gold and major fiat currencies. The contrast is striking when viewed cumulatively: while fiat expands permanently, Bitcoin’s inflation rate converges toward zero.

The scarcity advantage as a new benchmark

When collateral is denominated in a predictably scarce unit, both lenders and borrowers share a stable reference point for long-term value. Bitcoin thus functions not only as an asset, but increasingly as a measuring stick for other assets.

In an environment where central banks can create money at will, a fixed-supply digital bearer asset offers a radically different foundation for credit contracts. This is one reason why some institutions now treat it as strategic collateral.

Key considerations: volatility, capital rules, and regulation

Despite these advantages, Bitcoin presents challenges that prudent investors must address. Table 9 in the paper summarizes three major considerations: volatility, credit rating/Basel treatment, and regulation, along with their mitigation and trajectory.

Price volatility remains elevated at 35-55% annually,15 far above conventional assets. However, this figure has declined meaningfully from over 80% in 2017. Conservative 30% LTV ratios, real-time monitoring, and hedging tools help contain this risk for lenders.

On the regulatory side, Basel III/IV still assigns a 1,250% risk weight to Bitcoin.2 That said, the network now has more than 16 years of uninterrupted uptime, trillions of dollars of settled value, and over $110 billion in ETF assets.9 These facts are slowly re-shaping perceptions among policymakers and regulators.

Regulation remains fragmented globally. The EU’s MiCAR framework became fully effective in 2024, offering detailed rules for crypto-asset providers.19 In the US, the SEC has refrained from labeling Bitcoin a security, while the CFTC treats it as a commodity.16 China maintains strict prohibitions on cryptocurrency trading.17 However, developments such as the CFTC’s 2025 recognition of tokenized collateral and JPMorgan’s decision in June 2025 to accept Bitcoin ETFs as loan collateral show clear progress.820

Bitcoin versus traditional collateral: two scorecards

Traditional lending models and modern digital-native frameworks approach collateral very differently. This leads to contrasting assessments of the same asset.

Traditional bank and regulator view

From the vantage point of banks and supervisors, stable cashflows, long track records, and legal clarity dominate. When these metrics are applied, real estate and long-established equity markets score highly, while Bitcoin appears risky.

Table 10 in the paper scores Bitcoin, real estate, stocks, and gold on liquidity, volatility, average LTV, custody risk, historical data, regulatory clarity, and Basel capital requirements. Bitcoin scores well only on liquidity, yet very poorly on volatility and regulatory clarity.

Basel III/IV’s 1,250% risk-weighting is the culmination of this perspective. It encodes skepticism about high-volatility assets into formal capital rules, regardless of technological properties like transparency and programmability.

Modern family office and debt fund view

Family offices, private funds, and specialized lenders are less constrained by Basel formulas. They often prioritize 24/7 liquidity, on-chain verifiability, settlement speed, storage costs, counterparty risk, and global portability.

On this scorecard, Bitcoin excels. It receives top marks for real-time transparency, divisibility, low storage costs, and censorship resistance. Real estate, by contrast, scores highly on price stability but poorly on portability, verifiability, and settlement speed.

Table 12 consolidates these characteristics into a numerical matrix. Bitcoin attains perfect scores in six of eight categories, lagging only in price stability and regulatory clarity. Importantly, both of those weaker points have been improving over time.

The divergence between the two frameworks shows that evaluation methods, not just assets, must modernize. Those who continue to appraise Bitcoin solely through a 20th-century lens will likely underestimate its collateral potential.

Conclusion: from niche product to structural pillar

For family offices, private debt funds, and institutional lenders, the building blocks for responsible digital collateral markets now exist. The CeFi segment of institutional Bitcoin-backed credit, currently around $24 billion, stands adjacent to a $130 trillion fixed-income universe.1

Entering this space today with conservative structures is not a speculative punt; it is participation in a structural revaluation of what qualifies as high-quality collateral. Volatility, regulatory uncertainty, and operational complexity are real, but they are increasingly quantifiable and manageable.

The gold standard outlined here—30% LTV, continuous Proof-of-Reserves, multisig custody, no undisclosed rehypothecation, and 24/7 monitoring—defines an institutional-grade framework. Within that framework, risks can be modeled, stress-tested, and priced.

Borrowers should test every platform they consider against these criteria. They should ask who holds the keys, what maximum LTV is allowed, whether reserves are independently verifiable, and how liquidations are executed. Any lender unable or unwilling to answer clearly is not ready for institutional capital.

Lenders, for their part, need rigorous due diligence and a clear view of how platforms approach custody, collateral management, and communication with borrowers during stress. Those who build expertise now will be positioned to lead when regulatory treatment eventually catches up with technological reality.

Regulatory frameworks currently reflect an era before Bitcoin existed. But with more than 16 years of network uptime, over $110 billion in ETF assets, and growing participation from global banks, recalibration is likely. When capital rules are updated, the wall separating digital collateral from mainstream balance sheets will begin to come down.

New products are already on the horizon, including multi-collateral pools, non-liquidation insurance, and income-generating structures secured by Bitcoin. These innovations show that the market is not static but evolving rapidly as demand from sophisticated investors grows.

The traditional financial system has long relied on trust in intermediaries. Bitcoin introduces an alternative rooted in verification, cryptography, and open data. In a world of expanding fiat supply, a fixed-supply digital asset is becoming more than just another piece of collateral; it is emerging as a reference measure for value itself.

The question facing investors and institutions is no longer whether Bitcoin belongs in credit markets. The question is how they will position themselves as this new standard for digital collateral continues to develop.