A common question we’ve seen, in light of the recent Arch x Onramp partnership for Bitcoin-backed loans, is “Why the heck are interest rates 14%”? At first glance, many are quick to assume that such a rate is wildly expensive, prohibitive, or even predatory.

In reality, though, this could not be further from the truth. The interest rate reflects fair market pricing in line with the current cost of capital. 

This article aims to answer the following questions:

1. Why is this the current interest rate? 

2. What should the interest rate be for Bitcoin-backed loans? 

3. Given the current interest rate, is it worth taking a Bitcoin-backed loan? 

The Whole Bitcoin Trade is One of Asymmetry

Bitcoiners understand Bitcoin, the asset. We know that due to its properties of being publicly verifiable, deeply liquid, easily portable, and borderless, to name a few, it is essentially pristine collateral. If a lender were to design an asset from first principles of what they would like to underwrite loans against, it would look something like Bitcoin (perhaps minus the volatility). Therefore, theoretically, the correct pricing for loans against Bitcoin is considerably lower than where the market is today. 

However, banks, credit funds, and traditional private credit investors do not understand what Bitcoin is, intrinsically, on a fundamental level. By extension, they do not understand how to correctly price financing against it. 

And herein lies the Bitcoin investment thesis in a nutshell - this information asymmetry is why we are long Bitcoin, and everyone else is not. When this information asymmetry has closed, and Bitcoin trades at or above Gold parity, then yes, financing rates will be much lower, but so will your ability to acquire more sats! 

This leads to the second point… 

Bitcoin’s Compound Annual Growth Rate is 65%

The wealthiest individuals in society follow a simple principle: do not sell appreciating assets when you can borrow against them instead. This concept is foundational to the "Buy, Borrow, Die" strategy, where assets like real estate, stocks, and increasingly, Bitcoin, are used as collateral for loans instead of being sold, allowing wealth to compound tax-efficiently over time.

Consider Manhattan real estate in 1900. Would you have wanted to sell, or would you have wanted to finance against it? The answer is obvious in hindsight, yet this is precisely the decision Bitcoin holders face today. 

To put it bluntly:

If you are borrowing at 14% against an asset that appreciates by 65% each year, is the interest here really “expensive”? 

We Are In a High-Interest Rate Environment

The interest rate spread on Bitcoin-backed loans is not as extreme as some might think. The cost of capital in today’s market is (relatively) high across the board. The Secured Overnight Financing Rate (SOFR), a key benchmark for borrowing costs, sits around 5%, while mortgage rates hover between 6-7%. Stock-based lending and hard money loans can easily reach 11-13%, and these are secured against assets that traditional lenders better understand.

Bitcoin-backed lending is still perceived as riskier than these alternatives, primarily due to its volatility and the limited number of large, institutional lenders willing to participate in this market. As a result, sourcing capital for Bitcoin loans at scale remains expensive.

Should interest rates return to near-zero levels, as seen during previous economic cycles, Bitcoin-backed loan rates would naturally decline as well. It’s worthwhile to note that the 2008-2020 era of rates at the zero lower bound (ZLB) was a major historical anomaly.  Furthermore, as aforementioned, when more institutional players recognize Bitcoin’s value as pristine collateral, the gap between Bitcoin lending rates and other asset-backed loans will also comp. 

A Commitment to No Rehypothecation Increases the Cost of Capital 

The previous Bitcoin lending cycle was defined by platforms like BlockFi, Celsius, and Voyager offering low interest rates on crypto-backed loans. How? By engaging in rehypothecation - using client Bitcoin collateral to lend, trade, or take leveraged positions elsewhere. This approach introduced:

• Credit Risk: These platforms lent out Bitcoin to hedge funds, market makers, and high-risk counterparties. When those counterparties defaulted, customers were left holding the bag.

• Duration Mismatch: They accepted short-term customer deposits but held long-term liabilities, meaning that when liquidity dried up, they couldn’t meet withdrawal requests.

At Arch, we do not rehypothecate any client assets - ever. When you post Bitcoin as collateral, it is held in cold storage with Anchorage, a federally chartered U.S. bank and regulated custodian. Unlike past lenders, we don’t chase yield or use your Bitcoin for anything other than securing your loan (in fact we pay a not insignificant custody fee)! Your collateral does not generate a yield and subsequently subsidize interest rates. 

This begs the question, how do we fund our loans? 

Our Collateralized loan obligation (CLO) as a novel way of providing Bitcoin-backed loans

Rewinding a couple of years, there were two ways to provide lending against Bitcoin:

1. Off balance sheet

2. Rehypothecating to someone who has a balance sheet 

Neither of these scale, and we have seen how the latter has a propensity to induce credit and duration mismatches which are ultimately unsustainable and put the borrower at risk. 

That’s why Arch raised a traditional debt facility in the form of a Collateralized Loan Obligation (CLO), initially seeded by Galaxy Digital. 

A CLO  is a structured financial product that pools a set of corporate loans and segments them into different risk tranches, offering investors a range of risk-return profiles. With this, Arch has scalable access to capital from traditional lenders. There are a number of important implications of this CLO: 

1. No rehypothecation by design. We can ensure that your Bitcoin remains securely held at all times in cold storage. This minimizes counterparty risk and protects borrowers from the systemic failures seen in previous lending platforms. Moreover, unlike other lenders who offer the ability to opt into rehypothecation, our loan book is not exposed at all to these risks. A small loss on their rehypothecated positions could ripple through their entire book - whereas at Arch, our loans remain secure and insulated from such systemic risks.

2. No duration mismatch. Our CLO structure allows us to align the terms of our funding with the duration of our loans, preventing “bank runs” or liquidity crunches. Unlike past lenders who relied on short-term deposits to fund long-term loans, we maintain a stable capital base, ensuring that borrowers are never caught in a withdrawal freeze.

3. Transparent source of capital and a simple business model.   Our funding comes from traditional debt markets, rather than from complex, opaque strategies that rely on rehypothecation or short-term speculation. This ensures that our business model is straightforward: we lend against Bitcoin without taking unnecessary risks, allowing borrowers to clearly understand how their loans are funded and secured.