Bitcoin wrapped tokens allow borrowing without selling assets

Bitcoin holders seeking liquidity without selling their assets are increasingly using wrapped tokens to borrow against their holdings. Because many decentralized lending applications operate on networks like Ethereum, Bitcoin cannot be used directly as collateral. To bridge this gap, holders entrust their BTC to a custodian, which then issues a representative token on another network.

Several major players are competing in this space. Circle recently introduced cirBTC for institutional investors, positioning it against established products like Coinbase’s cbBTC and the widely used WBTC. These arrangements function similarly to warehouse receipts, where the token can be traded while the underlying Bitcoin remains in custody.

However, this method introduces specific risks. Borrowers face potential liquidation if the value of their collateral drops significantly below the loan amount. Furthermore, users become dependent on the custodian’s ability to safeguard the original Bitcoin and the reliability of the redemption process to ensure they can eventually reclaim their assets.