Custodia Bank’s Caitlin Long has often repeated the phrase "a fool and their leveraged bitcoin are soon parted." And, of course, there isn't a shortage of examples to point to in crypto where excessive leverage has ended terribly.

On the sidelines of the Bitcoin Conference, Roundtable anchor Rob Nelson and Custodia Bank’s Founder and CEO Caitlin Long delved into the nuances of bitcoin and leverage, offering insights into this evolving financial landscape.

Nelson kicked off the conversation by sharing his personal experience, highlighting how he keeps a significant portion of his risk portfolio in bitcoin. He emphasized the value of holding onto the asset while exploring ways to leverage it without losing its growth potential. Nelson likened his bitcoin investment to a locked-up vault that continues to grow in value, pondering over the potential of using it as collateral instead of selling it off.

Caitlin Long provided clarity on the concept of leveraging, distinguishing between using bitcoin as collateral and going beyond a one-to-one leverage ratio. She explained that leveraging becomes risky when it exceeds 100%, leading to insolvency. Long suggested that leveraging bitcoin up to 50% of its collateral value is a safer approach, akin to taking a loan against a house without selling parts of it. This method allows investors to retain the growth of their bitcoin while borrowing against its value.

The discussion also touched on the pitfalls of high-yield promises from platforms like BlockFi and Celsius, led to significant losses due to excessive leverage. Long emphasized that these platforms’ high yields were unsustainable, as they relied on leveraging beyond the actual value of the bitcoin, similar to the way some banks operate with traditional assets.

Long elaborated on the broader banking system's reliance on leverage, explaining how banks make profits by borrowing at low short-term interest rates and lending at higher long-term rates. This traditional banking model, she noted, contrasts with bitcoin’s disinflationary nature. Unlike traditional assets, bitcoin’s supply growth decreases over time, making it a unique asset class.

Nelson expressed curiosity about the future of bitcoin halvings and their impact on the asset’s value. Long acknowledged the uncertainties but remained optimistic, pointing out that macro factors such as regulatory policies and Wall Street’s involvement could significantly influence bitcoin’s trajectory. She warned that excessive leveraging by traditional financial institutions could pose risks, drawing parallels with the gold market, where claims vastly exceed actual gold reserves.