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0 sats \ 1 reply \ @TwoLargePizzas 18 Apr 2023 \ on: Bitcoin Loan VS Bitcoin-backed Loans: Pros & Cons bitcoin
Imagine you live in a world where you have all of your wealth in BTC but you earn your income in fiat and still need to pay bills in fiat. You only have a few options.
- Sell some BTC, incur a taxable event, pay the bills, pay the fiat tax bill.
- Pay bills in fiat from your income, buy more BTC with whatever is left over.
- Borrow against your BTC, no taxable event, pay the bills, repay the fiat loan.
Option 1 is the worst scenario. You don't want to sell your BTC and incur a tax event because now you have more bills and less BTC.
Option 2 is better, if you can manage your finances well, you might never need to borrow money to pay your bills. But it probably means you can't buy as much BTC as you'd like because you always need some fiat buffer for bills.
Option 3 is a nice to have. If you have a large unexpected bill you can pay it with borrowed money. No taxable event and you can repay the loan over time usually at a low interest rate. But it does carry extra risk, usually counterparty and margin calls.
Now imagine a different world where you have all your wealth in BTC and your income is in BTC and there's no taxable events for paying your bills in BTC. This is a very different world.
In this world, the lender is taking way more the risk than the borrower because of BTC's fixed supply. Fractional reserve is way more difficult since BTC can't be created out of thin air. In theory I can still lend out my BTC to someone else, but once it's lent it's no longer in my possession and I can't lend it again.
This last one you mention is the world/context I’ve placed my question within, where a borrower can borrow and return BTC. As you mentioned, it’s not an ideal scenario for the lender and that’s why is important for me to define other incentives that aren’t only focused on a %ROI … the journey continues with really little advancements
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