The global market value for collateral is estimated to be close to $20 trillion in assets dominated by government bonds and cash-based securities currently.
The last surge in bitcoin price to over $61,000 was on the back of the $1.9 trillion Covid relief package announced by the US government.
The use cases for bitcoin (BTC) have come a long way since the inception of the virtual currency. From what began as a peer-to-peer payment system, bitcoin’s potential is now expanding to challenge bonds and cash-based securities as the “perfect collateral asset for the future,” according to a latest global study on the crypto king. The global market value for collateral is estimated to be close to $20 trillion in assets dominated by government bonds and cash-based securities currently. “However, in that, there is a growing weakness as rehypothecation creates a systemic risk in the financial system as a whole. The increasing reuse of collateral makes these assets far from risk-free and shows the potential instability of the financial markets,” said a study by the Norway-based bitcoin and crypto intelligence firm Arcane Research.
What makes bitcoin the preferred asset for collateral in the future is the fact that it doesn’t have counterparty risk (chances of one of the parties involved in a transaction defaulting on its contractual obligation) and credit risk, the study noted. Moreover, bitcoin is available for trading round the clock globally and can be transferred across the world at almost no cost. “It is the most portable asset the world has ever seen…No other assets can match these properties today, making bitcoin the perfect collateral asset for the future.”
Based on Arcane’s calculations and data collected in its report, around 6.25 lakh bitcoins (approximately worth $30 billion) are estimated to be in use as collateral in the crypto market. This number is based on estimations of collateral held in the derivatives market, in relation to bitcoin collateralized lending and tokenized bitcoin in Decentralized Finance (DeFi). DeFi is essentially referred to multiple financial applications built on blockchain such as smart contracts, borrowing and lending, decentralized marketplaces, and more. “Comparing this number of 625,000 BTC to the total collateral market, shows that bitcoin collateral only accounts for 0.15% of the total collateral market today,” the report added.
Within lending markets, as per the data from the Singapore-based crypto credit data company Credmark, around 4.2 lakh bitcoins were used as collateral in various loans in Q4 2020. The growth in the segment has been of 2.13 lakh bitcoins from Q4 2019 to Q4 2020. This based on the “modest estimate of 50 per cent of active loans being backed by bitcoin collateral,” even as 1 million bitcoins are likely to be used as collateral in the lending market within a three-year horizon.
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