Some banks and other lending institutions are close to allowing cryptocurrency-backed loans to take place. Many of them, if they go this route, would start with Bitcoin. Of the various cryptocurrencies to hit the market over the past decade, Bitcoin is the one that’s worth the most and has the broadest exposure.
If banks, credit unions, and private finance companies start letting this happen, they can quickly see some significant returns. Let’s look at a few of the more prominent reasons why this strategy makes sense.
More Diverse Portfolios
For one thing, cryptocurrency-backed loans make sense because if more institutions start accepting Bitcoin or other cryptocurrencies as collateral, that makes them inherently more valuable. That will mean they have gone from a niche investment into the mainstream.
Savvy investors know they must have diversified portfolios if they want the best chance of striking it rich over time. If financial institutions allow Bitcoin-backed loans to happen, that means virtually everyone will want Bitcoin as part of their holdings. Also, someone can pay off a loan, and the lender will get back their original investment. Plus, they get to keep any earned interest.
Lower Infrastructure Costs
Bitcoin technology uses blockchain, as do all credible cryptocurrencies. Blockchain is nearly impossible to hack, but it’s also very easy to set up and monitor with a simple algorithm and the proper technology.
This means that banks or credit unions that allow cryptocurrency-backed loans will also be using blockchain by default, and they can cut down their operational costs that way. Large banks will achieve a transparency level never before seen, and they will also have unadulterated data quality, so people will trust them. At the same time, they can offer better interest rates because their entire operational budget will drop.
Fewer International Barriers and Hurdles to Overcome
If someone wants to do business with an international bank, they often find it difficult. They need to obey their own nation’s financing laws, and they also have to establish they have the assets they claim they do. If they can’t easily prove that, an international bank might not want to do business with them.
If you just started a business and you are finding it difficult to leverage assets with an international bank, you can do that much easier if you secure a cryptocurrency-backed loan. Everyone accepts Bitcoin because it has an internationally recognized value.
Cryptocurrency is a global asset. Any borrowers out there with business interests can set up financial partnerships much easier with a Bitcoin loan than they ever could previously. They can find lenders anywhere in the world, and then they can expand into overseas markets, regardless of their niche or industry.
These Loans Will Increase Cryptocurrency’s Value
If more banks and credit unions elect to use Bitcoin for loans, that will also increase its value. It’s already worth much more than it once was, but this mainstream credibility will drive the price up even further.
Credibility becomes a self-fulfilling prophecy. Since banks and private lending institutions say they’re backing loans with it now, that indicates they accept that it is valuable.
Other institutions will see what they’re doing, which drives the price further up in turn. This is how a niche monetary instrument achieves heights the creators would never have dreamed of just a few years ago.
Lower Interest Rates
If someone tries to get a low-interest loan, a bank or private lending institution is more likely to let them have it if that loan is asset-backed. It’s the same as getting a bank to loan you money if you’re putting up your house as collateral.
If banks and private lenders decide they’ll accept and even promote cryptocurrency-backed loans from now on, that means they’ll be able to offer more diverse client loans with lower rates. They can attract new customers, such as would-be company owners who can show them a credible business plan. They can even grant loans to riskier business ventures, like online gambling or legal marijuana in approved states.
Adding Bitcoin to a lending portfolio shows that this exciting cryptocurrency has arrived in a big way. Perhaps other cryptocurrency forms will follow suit, but for now, only certain ones have gained the mainstream appeal that warrants this action, and only a few lending institutions are taking this step.
Since cryptocurrency has many potential benefits, though, don’t let it surprise you if you hear more about this in the financial sector before much more time passes.
Founder Dinis Guarda
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