Bitcoin-backed loans are loans guaranteed by a collateral in bitcoin.

Provided that the price of bitcoin significantly increases during their duration, they have the following advantages:

1. they allow to 'use' one's bitcoins (e.g. for expenses or investments) without spending them, and therefore without loosing on its capital gain potential;

2. they allow to avoid capital gains tax on bitcoins: loans are not taxed;

3. they are approved in a matter of hours, without too much fuss and bureaucracy.

There are however some disadvantages:

1. one loses control over his/her own private keys (obviously);

2. these loans tend to be over-collateralized: for example, to obtain a loan of 1$ (say at 10% interest rate) one has to give 2$ worth of bitcoin collateral (this means that the initial loan-to-value ratio - or LTV - is 50%). In addition, if the LTV ratio rises above a certain threshold (say 70%), the borrower must "top-up" the collateral or have his loan liquidated.

3. there can be risks: both in terms of moral hazard (an element of trust is needed, though this is not true for all providers: see later) and economic risks (the lender may go bankrupt).

Economic risks are very significant. In order to minimize them, it is imperative that the lender offers the guarantee of no rehypothecation and that the borrower chooses it (even if it implies an higher interest rate). Ideally, the lender (or lending platform) offers the proof of reserves independently verifiable on the blockchain.

The lender should offer independent proof that the security protocol is of the highest level and evolving with the threats.

Finally, the lender should operate only in Bitcoin (no altcoins).

To our knowledge, the only company active in the EU that satisfies all these criteria is firefish.io

A company that satisfies most of these criteria in the US is unchained.com.