Innovations rarely knock twice in crypto. Bitcoin credit cards are one such disruption that let you use bitcoin in another innovative way.
With many applications that are attributed to bitcoin, the essence is that these cards have managed to form a bridge between the on and off ramps of digital assets and traditional finance.
In this article, we will take you through the concept of Bitcoin credit cards, their types and some examples, and how they could combine (in the future) decentralized aspects we are currently building.
But first, let’s understand what credit cards are!
Credit Cards 101
We all know of or have used credit cards, but in general financial terms, a credit card is a payment system which allows users to purchase goods or services, or withdraw cash, on credit.
In return, you pay back the borrowed money, plus any applicable interest and any additional agreed-upon charges, either in full by the billing date or over time.
These cards exists either in virtual or physical form as a thin rectangular piece of plastic or metal that allows you to swipe, insert, or tap it to pay.
Since their introduction in the mid 20th century, credit cards have been a product issued by banks, credit unions, or other financial institutions. But with the changing paradigm and the coming of the digital age, they have been introduced by new entrants — namely cryptocurrency companies.
One notable example is Bitcoin itself, our beloved OG in the crypto space…
Bitcoin Credit Cards
When we examine Bitcoin credit cards, we see that they are coming from or are issued by financial institutions and crypto exchanges. These centralized parties provide decentralized crypto assets and offer credit cards in two main forms: secured🔒 and rewards-based✨.
🔒 Secured Bitcoin credit cards are ones where BTC is used as collateral for loans. Unlike most traditional models where credit ratings (the ability to repay a debt) are often used as the determinant for credit card loans, these cards allow the holder to borrow or spend against their BTC deposits.
Typically, the cardholder must deposit enough collateral in a specified deposit account to cover their expenses. In most cases, this collateral is between 100% and 200% of the total amount of credit desired.
If you deposit BTC worth $1,000 on a credit card, you will be given credit in the range of $500–$1,000. It is important to note that you must still make regular payments within a specified time limit, as with a regular credit card. Failure to do so results in a penalty charged as interest, which varies from card to card.
✨ On the other hand, Bitcoin reward credit cards are ones where BTC is issued as a reward whenever a purchase is made. They function similarly to traditional reward credit cards, but instead of getting rewards on certain types of purchases in the form of cash back or points, you get rewarded in bitcoin.
These rewards are deposited directly to your linked crypto wallet or for some cards, directly into your account associated with them.
Features of Bitcoin Credit Cards
First, by using Bitcoin as collateral, lenders can reduce the risk premium or the extra interest rate charged to cover the possibility of default in unsecured loans. This could bring down interest rates from the average of 28% 😱 seen in traditional credit cards to more manageable levels where interest can be as low as 2.9%-18.9%, as we will see later.
Secondly, with Bitcoin as collateral, lenders have a secure asset that can be liquidated easily if necessary to recover their funds.
Third, Bitcoin opens the door for more people to access credit facilities. Anyone holding Bitcoin, regardless of their credit ratings, could potentially secure a credit line and build a reputation for themselves.
With that in mind, let us now look at some examples of Bitcoin credit cards…”
Examples of Bitcoin Credit Cards
There are several Bitcoin-based credit cards, but in this article we will only look at the two most prominent, where BTC is used as either collateral or a reward token.
Nexo Credit Card
Nexo is a crypto-backed credit card that allows you to put up your crypto as collateral to make purchases without selling your assets. Bitcoin is among the key supported cryptos.
When you make a purchase, the amount is automatically deducted from your ‘available to borrow’ balance, which is backed by your BTC assets.
Note that as of the time of writing, only residents of the European Economic Area (EEA) and the UK can order the Nexo credit card.
Gemini Credit Card
Issued by Gemini in partnership with WebBank and Mastercard, this credit card allows you to earn up to 4% back in Bitcoin on the dollars you spend on qualifying purchases. It is important to note that unlike Nexo, which uses Bitcoin as collateral, Gemini does not. Instead, it is based on credit ratings.
The card does not have annual fees, no foreign transaction fees, and no exchange fees for the rewards. The card is only available in all 50 U.S. states and is accepted wherever Mastercard is accepted.
The main advantage is its instant rewards, which are paid out at the time of purchase directly to your Gemini-linked exchange.
Are There any Other Types of Bitcoin Cards?
Yes! Apart from credit cards, Bitcoin found its way to debit and prepaid cards, with the difference between them being how BTC is used.
Bitcoin debit cards are directly linked to your digital wallet for spending, which means you are not borrowing but using the BTC in your account. When you make a purchase, the card automatically converts the required amount of BTC into fiat currency at the point of sale.
On the other hand, in the prepaid mode, you use BTC to fund the card but manually swap it for the native asset of the card, which in most cases are stablecoins. This means you can only spend up to the preloaded amount.
These two modes of Bitcoin cards also allow you to withdraw cash from ATMs where they are supported. In addition, some may offer rewards in the form of cashbacks.
With that, let us now look at some examples of these cards:
- Xapo Card, a debit card provided by Xapo Bank, is a digital bank that combines traditional banking with cryptocurrency services, especially Bitcoin. It allows auto-conversion where in case of low US dollar balance, it can auto-convert your Bitcoin balance to complete a purchase.
- Fina, a VISA prepaid card, can connect to any non-custodial wallet so users can top it up with various cryptocurrencies, including Bitcoin. It then automatically converts the crypto into stablecoins or fiat currencies accepted by VISA merchants.
- Coinbase Card is a VISA prepaid debit card designed by Coinbase exchange, which allows users to spend their BTC and seven other cryptocurrencies.
Besides this, some projects that want to roll out their own Bitcoin-backed credit cards, such as DebiFi and Fold, are more than welcome to join our ecosystem.
Bitcoin’s Volatility Impact??
Lastly, we must address the turbulent volatility for which Bitcoin is also famous. While its volatility is a concern when used as collateral for credit loans—since a 30% drop in value can occur in just one day—it could significantly affect borrowing limits, the stability of the loan, and the mental well-being of both the borrower and lender.
To address this issue, some credit cards have implemented protective measures such as dynamic loan-to-value (LTV) ratios. These ratios adjust based on market conditions to protect against sharp declines in Bitcoin’s value, requiring borrowers to add more Bitcoin as collateral. This indicates that we are not yet on par with traditional methods.
We need to be aware that we are still experimenting and must accept that many new developments, both positive and negative, will follow.
Remember, apart from volatility, it is also important to note that Bitcoin-based cards are not without risk. Incidents like the collapse of BlockFi serve as a warning to be cautious when choosing a credit card issuer.
