The adoption of Bitcoin continues to increase with the announcement of a new type of loan from Goldman Sachs Group. The company released information on a new Bitcoin-backed loan on May 3rd, 2022 in collaboration with Coinbase.
The collaboration between Goldman Sachs Group Inc. and Coinbase Global Inc. is focusing on offering a loan option that is backed by Bitcoin. This type of loan has been used in the past by other smaller companies, but will be a new way for more traditional lenders to participate in utilizing Bitcoin.
Some consider this move to be a huge step for the world of digital assets, as it showcases the “recognition of crypto as collateral, which deepens the bridge between fiat and crypto economies” as aptly put by Brett Tejpaul, head of Coinbase Institutional. Just last week a borrower used a Bitcoin-backed loan, and Goldman expects many more to do so in the future.
Typically when using a Bitcoin-backed loan, borrowers receive fiat currency from a lender in exchange for Bitcoin or another cryptocurrency that is given as collateral to a custodian. A typical loan-to-value for Bitcoin would be 40-60%. The prepayment terms, as well as the interest rate may vary greatly depending on the lender, and should be researched closely prior to leveraging a loan.
Coinbase has both an extensive cryptocurrency and cash fund. In its 2021 annual report, Coinbase reported that it held approximately $183 million in Bitcoin, and $7.1 billion in cash. These values do not include custodial funds or restricted cash, and also do not include the other cryptocurrencies held outside of Bitcoin. This makes Coinbase an ideal partner in this type of endeavor.
Other banks like Signature Bank and Silvergate Bank have also gained a reputation for being crypto-friendly. Crypto prime brokerages like Genesis are constantly searching for other investment banks looking to collaborate in a similar fashion.
The Goldman Sachs collaboration is likely to be a direct result of an increased need and demand for these types of loans.