NYDIG, a subsidiary of Stone Ridge that specializes in offering Bitcoin-backed loans, is gearing up to expand its services by introducing float financing, as outlined in the company’s latest investor letter.
The letter addresses common criticisms of Bitcoin’s utility, asserting that the cryptocurrency can be utilized to generate cash flow through sales and can also serve as collateral for fiat loans.
Float, a crucial concept in insurance and asset management, refers to investable capital derived from premium payments or reserves. While Stone Ridge’s Longtail Re has experience deploying billions of dollars in asset-backed loans, none have been backed by Bitcoin thus far.
Berkshire Hathaway, led by Warren Buffett, is renowned for leveraging its float to enhance its financial position. The company’s float has increased from $114 billion in 2017 to $164 billion as of December 31, 2022.
By incorporating float into Bitcoin-backed lending, the market could undergo a significant transformation, providing BTC holders with a new source of liquidity. This move could create a positive feedback loop, increasing the utility of Bitcoin holdings by keeping them off the market, accelerating fiat currency debasement, and further bolstering Bitcoin’s value.
Marathon Digital advisor Sam Callahan hailed the initiative as a major development, noting that it would unlock one of the largest investable pools of capital in the financial system and inject it into the Bitcoin ecosystem. He echoed the report’s vision that more efficient lending processes backed by Bitcoin would lower costs, prevent BTC from being sold for liquidity, increase scarcity and demand, attract more institutions, and expedite its adoption.
Stone Ridge labels Bitcoin-backed loans as “HODL loans,” positioning them as potential rivals to traditional stock margin loans in terms of risk profile and cost efficiency. Despite Bitcoin’s historical reputation for volatility, the report argues that its risk metrics closely align with those of a typical US stock, paving the way for more competitive pricing in Bitcoin-backed lending markets.
Currently, Bitcoin-backed loans come with a premium, featuring interest rates that are notably higher than those of traditional stock margin loans. However, Stone Ridge anticipates that market forces will drive this gap to narrow, bringing Bitcoin-backed loan pricing closer to that of Regulation T margin loans in the foreseeable future.