Bitcoin Borrowing and Yield

A controversial topic

In a recent discussion, Michael Saylor, Executive Chairman of MicroStrategy, and Saifedean Ammous, author of "The Bitcoin Standard," explored the feasibility and implications of earning yield on Bitcoin and borrowing against it. Their debate highlighted contrasting perspectives on integrating Bitcoin into traditional financial systems.

Michael Saylor's Perspective

Saylor advocates for the integration of Bitcoin into conventional banking frameworks, suggesting that established financial institutions could offer Bitcoin-backed loans. He envisions a scenario where banks like JPMorgan or Bank of America provide USD loans collateralized by Bitcoin holdings, allowing individuals to access liquidity without liquidating their Bitcoin assets. Saylor argues that such services could enable Bitcoin holders to generate yield, similar to interest earned on traditional savings accounts, thereby enhancing Bitcoin's utility as a financial asset.

Saifedean Ammous's Counterarguments

In contrast, Ammous expresses skepticism about the sustainability and safety of offering yields on Bitcoin deposits. He contends that due to Bitcoin's fixed supply, generating sustainable yields is inherently challenging. Ammous warns that attempts to provide yield on Bitcoin could lead to systemic risks, drawing parallels to the failures of platforms like Celsius and BlockFi, which collapsed due to risky lending practices. He emphasizes that without a lender of last resort, such models are vulnerable to instability.

The Concept of a Lender of Last Resort

A central point in Ammous's argument is the absence of a lender of last resort in the Bitcoin ecosystem. Traditional banking systems rely on central banks to provide financial support during crises, ensuring stability. Ammous cautions that without similar mechanisms, Bitcoin-backed lending could face significant challenges, especially during market downturns.

Saylor's Defense of Traditional Banking Integration

Saylor counters by asserting that established banks, backed by government support, possess the necessary safeguards to offer Bitcoin-backed loans responsibly. He believes that integrating Bitcoin into the traditional banking system can provide holders with opportunities to earn returns on their assets without the need to sell them, thereby preserving their investment while accessing liquidity.

Broader Implications for the Cryptocurrency Landscape

This debate underscores the broader discussion about Bitcoin's role within the financial system. Saylor's perspective suggests a path toward greater integration of Bitcoin into existing financial structures, potentially increasing its adoption and utility. Conversely, Ammous's caution highlights the need to consider the unique characteristics of Bitcoin, particularly its fixed supply and decentralized nature, which may not align seamlessly with traditional banking practices.

As far as I’m concerned, I’d like the option to borrow against Bitcoin, but it would likely be small amounts and only for a short period of time and certainly not for speculation or investment. Almost nothing would give you a better long term return than Bitcoin held in cold storage. With that being the case, maybe “yield” is a relic of the fiat system and we should look at things a completely different way with Bitcoin.

Conclusion

The conversation between Saylor and Ammous reflects the ongoing discourse on Bitcoin's place in the financial ecosystem. While Saylor envisions a future where Bitcoin functions similarly to traditional financial assets, offering yields and serving as collateral for loans, Ammous urges caution, emphasizing the risks and structural differences inherent in Bitcoin. As Bitcoin continues to evolve, these discussions will play a crucial role in shaping its integration into the broader financial landscape.

Not financial or legal advice, for entertainment only, do your own homework.  I hope you find this post useful as you chart your personal financial course and Build a Bitcoin Fortress in 2024.    

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