🔄 Rehypothecation with Bitcoin

How It Works

1. You deposit Bitcoin on a CeFi exchange or lending platform.
2. The platform leverages your BTC as collateral for its own borrowing.
3. It may also lend your BTC to other users or reinvest it to generate yield.

Risks

• Volatility amplification: sharp BTC swings can trigger liquidations.
• Custody failures: if the platform goes insolvent, you may lose access.
• Commingling: pooled collateral makes tracking your 1 BTC impossible.
• Lack of transparency: you often won’t know how much is rehypothecated.

How to Protect Yourself

• Self-custody in a hardware wallet (cold storage).
• Avoid CeFi margin/lending; prefer DeFi protocols with on-chain collateral locks.
• Read terms of service—look for clauses that forbid rehypothecation.

Why It’s Controversial

• Contradicts Bitcoin’s trustless ethos.
• Reintroduces “too big to fail” counterparty risk.
• Blurs lines between user assets and platform balance sheets.