🎲 [Analysis] The Bitcoin risk spectrum – Nik Bhatia

Bitcoin's ($BTC) next step is to transition from a reserve asset to a functioning reserve currency by unlocking the bitcoin capital market. The Bitcoin risk spectrum is charaterized by the following qualities:

• X-axis is risk
• Y-axis is expected return
• The graph is a linear graph with a slope of 1 and increases in both risk and expected return
• Cold storage BTC, Lightning Network Reference Rate (LNRR), and off-chain lending are the three points on the graph in order of safe but low return to risky but high return
• Cold storage BTC and LNRR have no counterparty risk
• Off-chain lending has counterparty risk

Cold storage BTC:

• The analogy commonly used for cold storage is a gold bar held in your hand
• There is no counterparty risk; the risk is its storage and security
• The expected return on cold storage bitcoin is at best zero and is actually negative if you consider that storage costs and on-chain transaction costs are non-zero

Lightning Network Reference Rate (LNRR):

• Routing fees earned on bitcoin staked to Lightning payment channels can be expressed as an interest rate
• If a consensus can be reached on an interest rate calculation protocol, capital providers can publish interest rates in an open and transparent way
• Positive interest rates will attract bank-like entities that believe they can earn positive return using effective payment channel management and security techniques
• Bitcoin staked to Lightning is the most unique income producing asset in all of monetary history: income with zero counterparty risk

Off-chain lending:

• Real world lending of bitcoin has genuine counterparty risk
• These rates of borrowing should be higher than LNRR
• Lenders will need strong contracts in jurisdictions with strong rule of law to ensure repayment of capital, just as they do with fiat currencies
• Complete loss of principal remains