Rehypothecation & Bitcoin-Backed Lending

“Even today it is very difficult to get a conforming loan against Bitcoin, so people are forced into the crypto economy and this dynamic of rehypothecation. If you go to a crypto exchange, they may give you a loan for 5% but the catch is that this cheap money requires that you transfer the Bitcoin and they rehypothecate it”

Michael Saylor, Executive Chairman, Strategy Inc - the world’s largest corporate holder of Bitcoin.

Ontoro was created to solve the issue that Michael Saylor highlighted in a recent interview.

So, what is rehypothecation and why can it be dangerous for borrowers? Rehypothecation is extremely common across the global financial system, and at its simplest, it involves a lender taking the Bitcoin that you have provided as security for a loan and then doing something else with it. What exactly are they doing with it? Well, it really could be anything, it’s entirely at the discretion of the lender. They may actively trade your Bitcoin to generate a trading profit from it, they might decide to lend it out to someone else for a return, or they may find one of many esoteric ways to use your Bitcoin to generate additional income for them, such as using it to sell derivatives or pledging it in a DeFi platform to generate a yield on it.

Whatever they decide to do with it, they are using your Bitcoin to make themselves more money over and above the interest rate they are charging you. And if something goes wrong? Well, you wear the risk if they stuff up, and in some cases, you can still be on the hook to pay back your original loan, even if they have blown up your Bitcoin due to their own carelessness. This was the ugly situation faced by many borrowers on failed platforms like Celsius and FTX. Not only did they lose their Bitcoin, but they were also pursued by the liquidators of these platforms to pay back their loans.

We founded Ontoro with the mission to offer Australians the opportunity to borrow against their Bitcoin without having to enter the dreaded crypto economy and the rehypothecation risks that Michael Saylor is so concerned about. 

At Ontoro, we never rehypothecate your Bitcoin. It stays in a segregated wallet with institutional grade protection, and when you pay your loan back at the end of the loan term, your Bitcoin is returned to you. The very same Bitcoin that you provided to Ontoro when you took out your loan. 

Ontoro never touches your Bitcoin while the loan is outstanding and you will always have the comfort of knowing this, because you can check at any time that your Bitcoin is still in the same wallet that you sent it to. Everything is visible on the Bitcoin blockchain. Full and total transparency. And if you want to repay your loan early? That is no problem either, your Bitcoin is sent back to your wallet once the loan is repaid.

We all have times in our life when we need some additional cash to do other things with, perhaps your business needs some extra cashflow funding or you have found an investment opportunity that you want to take advantage of and don’t have enough spare cash lying around. 

Selling your Bitcoin is always an option, but if you are sitting on capital gains, particularly meaningful ones, you could be looking at up to 47% tax on these gains. And with the next Federal Budget looming next month, it is widely anticipated that the Federal government will reduce the capital gains tax discount for assets owned for over 12 months from its current level of 50%. There is even talk of the discount being abolished entirely. Plus if you believe that Bitcoin is going to continue to appreciate over time, selling it now not only triggers tax to pay but it also means you miss out on these future gains. 

With Ontoro, borrowing against your Bitcoin is an extremely efficient way to free up the liquidity that you need.  We can turn around a loan approval in less than two hours, with Australian dollars sent to your bank account in real time. You keep ownership of your Bitcoin and do not give up the potential of those future gains. You can even repay your loan early if you need to. Many of our borrowers have also been able to deduct the interest on their Ontoro loans against their income, making the loan even cheaper for them from an after tax perspective. 

Best of all, you know that your Bitcoin is safe and secure with Ontoro, never rehypothecated, with full transparency on the blockchain for you to verify that your Bitcoin is where it should be. 

As Michael Saylor emphasised, there is always a catch when someone offers you a cheap loan against your Bitcoin. If it looks too good to be true, it usually is, there are no free lunches in crypto.

Navigating crypto is hard enough as it is. With an Ontoro loan, you can sleep soundly at night without having to worry about where your Bitcoin is.