The digital credit market using bitcoin as collateral is growing rapidly and is emerging as a new financialisation area in the Bitcoin ecosystem. If the market maintains its current growth pace, it could expand over the long term into a market comparable to Bitcoin’s market capitalisation, a forecast showed.

On Sept. 18, Bitcoin Magazine reported that Dan Hillery (댄 힐러리) of UXTO said on the programme "The Allocators Edge" that the bitcoin-collateral digital credit market has grown to about $16 billion. He said the market, which effectively did not exist even 2 years ago, is expanding quickly and is among the fastest-growing areas in Bitcoin’s capital structure.

Hillery forecast that if credit products on Bitcoin continue to increase, a market could form over the long term that is large enough to compete with Bitcoin’s market capitalisation, put at about $1.5 trillion. The analysis focuses on the possibility that Bitcoin could be used as collateral for a range of financial products such as loans and bonds, beyond being a simple holding asset.

One of the key examples he described was floating-rate preferred securities such as STRC and SATA. Hillery assessed STRC’s floating-rate structure as a method that is hard to find precedents for even in traditional financial markets. He said share buybacks and capital market activities play an important role in keeping the product price near par value.

Bitcoin price moves are also a key variable for related products. If the bitcoin price moves sideways or falls, it could affect the risk structure of related companies such as Strategy and Strive, and of bitcoin-collateral bonds. Hillery did not present specific figures for future returns or performance of particular products.

He also stressed that digital credit should be viewed separately from digital equities. Even if they are financial products created within the same Bitcoin ecosystem, credit products and equity products differ in how losses occur and how risk is transferred, he said.

Inflows of large institutional funds are still limited. Hillery pointed out that major funds have not been able to sufficiently access the digital credit market. He said that while the market is growing, product structures, accessibility and liquidity are acting as factors that block full-scale entry by institutional capital.

A structured credit fund that UXTO is preparing also targets this market expansion. The fund consists of senior and junior tranches and uses as key design elements where leverage arises and how volatility risk is transferred. Liquidity and redemption issues, and the role digital credit could play in a traditional 60-40 portfolio, are also up for discussion.

Interest in Bitcoin’s financial market is expanding from spot prices and short-term trading to a credit market that uses collateral. As related products increase, market participants are expected to focus on issues including not only issuance structures but also liquidity, redemption terms, collateral management and how risk is transferred.