Bitcoin (BTC)’s unique features make it a perfect collateral asset, providing it with major potential to capture a share of the global collateral market which is estimated at close to USD 20trn, according to Norwegian crypto-focused research firm Arcane Research.
“Based on our calculations and data collected for this report, we estimate that around BTC 625,000 are used as collateral in the crypto market today, or approximately USD 30bn,” they said.
Basing the figure on estimations of collateral held in the derivatives market with regards to bitcoin collateralized lending and tokenized bitcoin in decentralized finance (DeFi), Arcane Research said that, comparing “this number of BTC 625,000 to the total collateral market, [data] shows that bitcoin collateral only accounts for 0.15% of the total collateral market today but the market is growing rapidly.”
The report’s authors admitted that it is difficult to produce precise data on collateral usage, but it is possible to size up the open interest in that market.
“What we do know, however, is the size of the open interest in the market. On February 3rd, 2021, the BTC collateralized futures market had a total of USD 6.7bn worth of open interest or about BTC 182,600,” the paper said.
Should bitcoin expand its foothold in the collateral market to 5% in the long-term, the cryptocurrency could capture as much as USD 990bn of this rapidly developing market, according to the report.
Per the researchers, BTC is perfect for this market because of these properties:
- It is an asset without both counterparty risk and credit risk.
- It is available for transacting 24/7, 365 days a year, all over the world.
- It is the most portable asset the world has ever seen.
“No other assets can match these properties today, making bitcoin the perfect collateral asset for the future,” they said.
Also, Arcane Research pointed to a number of reasons for bitcoin collateral’s declining dominance in the futures market amid the emergence of other competitors for a sizeable share of the derivatives market.
“Stablecoin and USD collateralized futures are more favorable for long exposure. They are also less complicated when trading altcoins than the BTC collateralized futures,” the paper noted.
This said, “there are also clear advantages of using BTC as collateral in the derivatives market. BTC collateralized futures are powerful hedging instruments and come without any counterparty risk. This is different from stablecoin collateralized futures, which are exposed to risks affiliated with centralized stablecoin issuers,” according to the report’s authors who concluded that they “expect BTC collateralized derivatives to maintain a significant share in the future.”
Arcane Research is part of Norway’s digital asset-focused company Arcane Crypto.
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