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

Provided that the price of bitcoin significantly increases, 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 15% 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 are risks: both in terms of moral hazard (an element of trust is needed) 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-rehypotecation and that the borrower chooses it (even if it implies an higher interest rate).

It is also necessary that the lender allows the borrower to independently verify the status of his collateral 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).

One company that is about to launch in Europe with bitcoin-backed loans having these characteristics is verify21.com.

The company ledn.io offers bitcoin-backed loans in Europe with no re-hypotecation. However, it does not allow the borrower to independently verify the status of his collateral on the blockchain.

A company that offers these loans in the US is unchained.com.