NYDIG, Stone Ridge’s subsidiary that offers Bitcoin-backed loans, is preparing to expand its offering through float financing, according to the firm’s 2024 investor letter.
The letter rebuts common objections to Bitcoin’s (BTC) utility, suggesting that it can generate cash flow through sales and serve as collateral for fiat loans.
Float is a key concept in insurance and asset management. It represents investable capital derived from premium payments or reserves. Stone Ridge’s Longtail Re has experience deploying billions of dollars in asset-backed loans, albeit none backed by Bitcoin.
Warren Buffett’s Berkshire Hathaway is notoriously known for using its float as leverage. The company raised its float from $114 billion in 2017 to $164 billion as of Dec. 31, 2022.
Consequently, integrating float into Bitcoin-backed lending could transform the market and offer BTC holders a source of liquidity.
Stone Ridge envisions a positive feedback loop of increased utility for Bitcoin holdings by keeping them off the market, accelerating fiat currency debasement, and further enhancing Bitcoin’s value.
Marathon Digital advisor Sam Callahan called the move a big deal, as it would unlock “one of the largest investable pools of capital in the entire financial system” into the Bitcoin ecosystem.
He also shares the same vision from the report that more efficient lending through Bitcoin backing would lower costs and prevent BTC from being sold for liquidity. This would boost the price by increasing scarcity and demand, attracting more institutions, and accelerating its adoption.
Rivaling stock margin loans
Stone Ridge refers to Bitcoin-backed loans as “HODL loans,” which rival traditional stock margin loans in terms of risk profile and cost efficiency.
While the market historically perceived Bitcoin as volatile, the report argues that its risk metrics align closely with a typical US stock. This equivalence opens the door for more competitive pricing in Bitcoin-backed lending markets.
Currently, Bitcoin-backed loans come at a premium, with interest rates significantly higher than traditional stock margin loans. However, Stone Ridge anticipates that competitive forces will narrow this gap, bringing Bitcoin-backed loan pricing closer to that of Regulation T margin loans in the near future.
