Strike has unveiled a Bitcoin-backed loan product that removes the risk of margin calls and forced liquidations, even when Bitcoin’s price plunges dramatically. This “volatility-proof” loan aims to safeguard borrowers from abrupt liquidations that have frequently occurred during market downturns, trading a higher interest rate and shorter loan term for that protection.
The new loan sets a maximum loan-to-value (LTV) ratio of 45% and carries an annual percentage rate significantly higher than Strike’s standard loans—ranging up to about 14%. Borrowers who pledge $100,000 worth of Bitcoin as collateral can borrow up to $45,000. The loan term is set at six months, requiring punctual payments to avoid liquidation, shifting risk from volatile market swings to borrower repayment capability.
Strike CEO Jack Mallers explained that customers demanded a loan without margin call interruptions after the previous product’s launch in a period where Bitcoin’s price dropped more than 50%. The latest offering reflects this feedback and focuses on eliminating forced liquidations regardless of Bitcoin price volatility.
Market volatility remains a formidable hurdle for widespread use of crypto-backed loans. Survey data from crypto lending platform Ledn indicates that although most crypto investors consider such loans, a small fraction actually uses them, primarily due to concerns about price swings and confidence in lending structures.
The strategy behind Strike's product involves allocating the higher interest collected toward hedging market risks, making the loan "volatility-proof" in practice. This contrasts sharply with other providers like Binance, Coinbase, Nexo, and Xapo Bank, which typically offer loans with margin call risks tied to Bitcoin’s price movements.
Bitcoin’s historical price patterns amplify the appeal and challenge of such loans. The cryptocurrency has endured multiple significant drawdowns, including a 54% drop over the past year alone, which has triggered forced liquidations on traditional crypto loans, magnifying losses for borrowers.
Industry observers note that this product could reduce forced selling during crashes, aligning loan risk more closely with the borrower's ability to service debt rather than short-term market gyrations. However, the trade-off is a notably higher cost of borrowing and strict repayment schedules.