The Opportunity in High Yield Crypto-Backed Loans

Due to limited crypto integration with the US banking system, some crypto entities are using Bitcoin as collateral for USD loans. These Bitcoin-backed loans currently yield 400-600 basis points above US Treasury yields. A standard model suggests a fairer value would be 150-200 basis points above US Treasury yields. These loans are overcollateralized and can be structured with a third-party custodian, simplifying management for traditional finance institutions. While a portfolio of these loans lacks diversification, it can be hedged using Bitcoin options markets. These loans offer a higher potential yield compared to junk bonds and less risk than investment-grade bonds given current market conditions. The current yield spread of junk bonds is less than 300 basis points above US Treasuries.