How Institutional Investors
Can Optimize Capital Efficiency 
with Bitcoin-Backed Credit Line

Bitcoin offers long-term value preservation, but for institutions, that strength often becomes a liability. And Bitcoin, in all its glory, doesn’t inherently produce yield. That’s fine if you’re a retail HODLer. But if you’re a treasury desk, an endowment, or an asset manager under performance pressure, a pile of BTC sitting cold and idle is a cost center.

This is what we’d call the Bitcoin liquidity trap. You hold BTC, maybe as a reserve asset, maybe as part of a macro thesis. But then what? You can’t use it to pay salaries. You can’t lend against it easily at scale. Selling triggers taxes and kills your long thesis. So instead, capital sits. The opportunity cost rises. IRR erodes. And you end up in a weird place where the asset you most believe in is also the one that's most deadweight. Institutions require a solution that unlocks Bitcoin's liquidity without necessitating its sale. They need the ability to borrow against BTC and turn it into a line of credit to enable investments.

Mezo solves this problem directly with MUSD, a stablecoin fully backed by Bitcoin collateral. MUSD is collateralized directly with BTC via over-collateralized smart contract vaults. Institutions can mint MUSD by locking Bitcoin, gaining predictable dollar liquidity without divesting their BTC. Loans are permissionless, fixed-rate (1–5% APR), built to scale, and suitable for large treasuries seeking liquidity without custodial tradeoffs. Every MUSD is redeemable for $1 in Bitcoin, at any time, enforced by smart contracts and transparently backed by onchain reserves.

Let’s dive into how institutions can use MUSD to escape the Bitcoin liquidity trap without selling, rehypothecating, or surrendering keys.

Bitcoin-Backed Credit Lines

Traditional financing models require assets that either have cash flow or can be easily rehypothecated. Bitcoin, being neither, sits outside the bounds of conventional balance sheet optimization. Credit lines collateralized by Bitcoin offer a way to introduce liquidity velocity without impairing the underlying exposure. Here’s how it works:

1. An institution posts Bitcoin as collateral
2. The lender defines a loan-to-value ratio
3. A credit line gets extended (i.e., MUSD, Mezo’s Bitcoin backed stablecoin)

Custody architecture matters deeply in this setup. Traditional centralized lenders typically demand relinquishing Bitcoin to a custodian, exposing borrowers to single-point-of-failure risks. Mezo uses tBTC, a decentralized bridge with probabilistic security guarantees. Unlike traditional centralized custodians, tBTC implements onchain verification of reserves, with custody distributed across the Threshold Network's cryptographically secured signer groups. This architecture provides institutional-grade security while maintaining the transparency and auditability required for proper risk management.

From a cost-of-capital perspective, Mezo offers substantial efficiency compared to centralized or traditional Bitcoin lending platforms. When live, Mezo will offer fixed interest rates ranging from 1-5% APR, resulting in significant savings against the standard 8.95%+ APR rates prevalent in centralized Bitcoin lending markets. The absence of origination fees further enhances IRR calculations, particularly for larger treasury positions seeking optimization. This pricing structure creates an attractive spread for arbitrage against higher-yielding opportunities while maintaining Bitcoin exposure.

The Dangers of Centralized Bitcoin Borrowing/Lending  

Crypto lending platforms like Celsius, BlockFi, and Genesis attracted BTC depositors by offering high interest rates funded through aggressive, opaque rehypothecation strategies. Customer BTC deposits were lent out to riskier borrowers, deployed into speculative trades, or used to finance arbitrage positions, often without sufficient overcollateralization. Throughout 2021, this model appeared sustainable during the bull market, but exposure to the collapse of major borrowers like Three Arrows Capital (3AC) and trading firms linked to FTX precipitated liquidity crises. Celsius filed for Chapter 11 bankruptcy in July 2022, BlockFi filed in November 2022, and Genesis filed in January 2023.

Risk & Outcome:

• Rehypothecation of user BTC deposits meant that client funds were routinely pledged as collateral for risky loans or speculative trades without individual users' direct knowledge or control, significantly elevating systemic fragility.
• Liquidity mismatch emerged as a critical structural flaw; platforms promised daily liquidity to depositors while locking assets into longer-term, illiquid investments, leading to withdrawal freezes once stress scenarios materialized.
• Counterparty risk was concentrated in a small number of borrowers, notably Three Arrows Capital and Alameda Research; defaults at these firms triggered cascading losses across lender balance sheets with no effective risk ringfencing.
• Inadequate collateralization practices meant that when counterparties defaulted, recovery rates for depositors were extremely low, resulting in billions of dollars in customer claims in bankruptcy proceedings that remain unresolved years later.
• Insolvency disclosures revealed deep structural mismanagement, such as Celsius’ $1.2 billion balance sheet hole and BlockFi’s exposure to FTX-linked entities, underlining that high yields were funded by unsustainable and highly correlated risks rather than robust credit underwriting.

Case Study: Earning Yield from Bitcoin-Backed Credit

Bitcoin is inherently a non-yielding asset. Holding BTC does not produce interest or dividends. To unlock yield opportunities, institutional players must deploy a range of structured strategies, including but not limited to:

• Leveraging Bitcoin as collateral for credit expansion
• Providing liquidity across capital markets
• Constructing derivatives-based yield structures
• Engineering Bitcoin-per-share growth through treasury management
• Creating instruments that monetize Bitcoin volatility

Each approach targets BTC-denominated returns while navigating counterparty risk, custody considerations, and leverage dynamics. Below are some examples of large companies or funds that are putting some of these strategies into practice.

Strategy

Strategy, the largest corporate BTC holder, pioneered Bitcoin-backed borrowing. In March 2022, its subsidiary MacroStrategy secured a $205M term loan from Silvergate Bank's SEN Leverage program, collateralized with ~19,466 BTC at a ~25% loan-to-value (LTV) ratio. The loan required maintaining LTV ≤50%, with BTC held by a third-party custodian (e.g., Coinbase Custody) and a $5M cash reserve posted.
The loan terms required interest-only payments, with a floating interest rate approximately equal to the Secured Overnight Financing Rate (SOFR) plus 3.7%. Strategy was obligated to make monthly interest payments under this structure. The capital raised through the loan was directly deployed to purchase additional Bitcoin, allowing the company to expand its BTC holdings without selling equity or existing Bitcoin reserves.

The logic is compelling: if BTC appreciates, MSTR stock rises, investors convert bonds to equity (eliminating repayment needs), and proceeds immediately purchase more Bitcoin. If BTC underperforms, bondholders hold a zero-yield bond rather than equity exposure. However, this strategy turns BTC into a productive asset on the balance sheet, but it introduces margin call risk if BTC’s value falls.

Risk & Outcome:

• During the 2022 bear market, MicroStrategy retained flexibility by posting more BTC to defend LTV thresholds.
• In March 2023, amid Silvergate’s collapse, MicroStrategy prepaid the loan at a 22% discount ($161M vs. $205M principal) and reclaimed 34,619 BTC.
• Simultaneously, it acquired an additional 6,455 BTC, ending with 138,955 BTC on balance sheet — increasing Bitcoin holdings while reducing debt.

This method of financing fits into a broader structural strategy designed by Chairman Michael Saylor, often referred to internally as "Bitcoin yield engineering“ or, Bitcoin yield per share. The flywheel is as follows:

1. Initial BTC Acquisition: Replaced idle cash with Bitcoin starting in 2020, positioning BTC as a superior store of value.
2. BTC Exposure Proxy: Before spot ETFs, MSTR stock served as an institutional vehicle for BTC exposure.
3. Equity Appreciation Loop: Stock price appreciation allowed attractive equity and convertible note issuance.
4. Convertible Debt Issuance: Raised capital at near-zero cost, betting BTC would outperform debt servicing.
5. BTC Per Share Growth: Reinvested proceeds into BTC, systematically increasing Bitcoin yield per share.

Strategy effectively created a securitized BTC exposure product, years before ETFs existed. Even now, many funds (e.g., pension plans, banks) can’t hold spot crypto or commodities, but they can hold equities or corporate debt. This makes Strategy a Bitcoin ETF with leverage and yield dynamics baked in, and moreover, a monetizable treasury product.

Nevertheless, this flywheel carries distinct risks. First and foremost is Bitcoin price risk; the entire model assumes that Bitcoin will appreciate over the long term. Debt rollover risk also looms: if Bitcoin underperforms, Strategy may find it more difficult or expensive to refinance outstanding obligations without resorting to dilutive equity issuance. Equity volatility presents another challenge, as Strategy’s stock price is tightly correlated to Bitcoin, meaning that bearish market cycles can hamper its ability to raise capital efficiently.

Marathon Digital

Marathon, a publicly traded mining company, similarly leveraged its Bitcoin to fund operations. In October 2021, Marathon secured a $100M revolving credit line with Silvergate Bank, backed by BTC and USD​. By late 2022, Marathon had 83% of its 11,440 BTC treasury pledged against two loans totaling $100M​. This high leverage made Marathon vulnerable to BTC price drops – as BTC fell ~75% from its peak, the loan LTV spiked, raising the risk of margin calls​.

Risk & Outcome:

• Marathon used a BTC-backed credit line to access liquidity for expansion without selling Bitcoin. As a result, over 80% of Marathon’s Bitcoin holdings were locked as collateral at one point.
• After credit conditions worsened due to Silvergate’s collapse and rising interest rates, Marathon proactively chose to deleverage to secure its treasury assets.
• Marathon protected its Bitcoin holdings through low initial LTVs, cash collateral, and early debt repayment.

TL;DR

Using BTC as collateral doesn’t “earn interest” on the BTC itself, but it can effectively generate BTC-denominated returns if deployed wisely. Strategy’s loan, for example, lets it acquire thousands more BTC (increasing its BTC stack by ~5%) – a leveraged BTC yield play, betting that BTC appreciation will outpace the loan interest. Marathon’s credit allowed it to hodl mined BTC longer (avoiding forced sales for operating cash), effectively increasing net BTC retained if mining economics later improve. The “yield” here is measured in additional BTC accumulated or retained due to the loan. The trade-off is interest cost (often paid in fiat) and liquidation risk. In  Strategy’s case, the loan interest (~8% annual by 2023) was paid in USD, but the benefit was more BTC acquired at lower prices. These BTC-collateral loans require robust risk management (monitoring LTV, maintaining liquidity to pay interest or reduce debt) but can be a powerful tool for institutions long-term bullish on Bitcoin.

By contrast, the failures of BlockFi, Celsius, and Genesis highlight the dangers of aggressive rehypothecation, inadequate collateralization, and liquidity mismatches. High headline yields often mask extreme systemic risks: assets pledged to risky counterparties, locked into illiquid investments, or recycled through complex leverage chains.

Mezo: A Better Framework for Institutional Risk

Institutions won’t touch Bitcoin yield strategies without satisfying the basic checklist: Who holds the keys? How quickly can LTVs change? Are liquidations rules-based? What jurisdiction governs disputes? Is the collateral insured and auditable? These questions are the foundations of fiduciary responsibility and something Mezo does not take lightly.

In fact, Mezo is built with this reality in mind. Sure, Mezo offers loans against BTC, but more importantly, it provides predictable, transparent, defensible infrastructure. Vaults are dedicated. Collateral is segregated. Through the Tigris system, BTC lockers receive credit facilities and accrue governance rights over protocol operations. Tigris is not a token inflation scheme or an ephemeral airdrop economy. Tigris is a durable framework that transforms locked BTC into active governance weight and BTC native fee accrual. For more on Tigris, check out this post.

Mezo is secure by design, transparent by principle, and tailored for the specific needs of institutional allocators who view Bitcoin as a holding and a working asset.

Mezo mainnet is imminent. Get ready to borrow against your Bitcoin collateral onchain, completely permissionlessly.

The road to banking on yourself starts with borrowing on Mezo.

👉 Start Today:

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