One of the pains we deal with in the real world is banking. Banking is a major part of our lives with checking, savings, credit cards, loans and mortgages. Banking is also full of ways to stop you from using these services from KYC to credit scores to arbitrary and subjective feelings by a bank employee regarding your transaction. I’ve documented a laundry list of why I hate banks and now I am documenting ways to get around banks. Banks aren’t your friends – they want you to believe that what they provide is out of the goodness of their heart when they provide 0.01% interest on savings accounts or 12% to18% (and more) on credit card interest due, or the mortgage (ie – from the latin meaning ‘death pledge’) that front-loads interest in a marketing scheme that makes you think a 3% mortgage loan is cheap. It’s not. Have you ever really looked at the amortization chart or the documents you sign and see that 97% or more of your payment goes to paying interest for the first several years?
Take your financial power back and away from the banks and opt out of the fiat banking system as much as possible. You will do yourself a favor in the long-run. And as financial services grow in the Bitcoin, crypto and DeFi markets, your options will also grow in time.
One of the biggest banking tools that you can give yourself is leverage. You take the asset you own (cryptocurrency) and put it to use in more powerful ways than just pure organic growth (or loss due to volatility). You can borrow against it very inexpensively. You can stake it (providing liquidity and security for the defi platform) and earn coins, interest, streaming fees and user fees. You can earn significantly higher APY’s (annual percentage yield) with these DeFi and crypto banking services than in the real world (IRL – in real life). There are risks here. You can over-leverage your holdings. If you pledge too much of your asset and the asset valuation goes down, you risk getting your locked assets liquidated to cover your loan. Or other drawdown activities may make your holdings illiquid. Definitely research the specific type leverage you are choosing and understand the risks involved. You could lose your entire asset.
Taking a loan against your cryptocurrency asset is a powerful tool. You can borrow against it in times of need at a low interest rate (around 5%) without any approval process other than maybe the initial KYC to open an account. If you have the asset on hand, you can get a credit line against it. I regularly hold crypto at a digital crypto bank that I borrow against to pay for my child’s schooling every six months and pay it off monthly over the next six months – rinse and repeat each cycle. The risk here is volatility of the asset and getting force-liquidated if the asset price plunges. As of today (January 7, 2022), bitcoin is down 37% since its all-time high in November at $67K. Most of the crypto banks provide a max leverage of 50% of your asset. But the prudent recommendation is to never take more than 25% in loan proceeds. If you have $10,000 in bitcoin and borrow 50% ($5,000), your whole asset is staked ($10,000). If bitcoin drops 50% from the time you staked it, you either have to deposit more bitcoin or the bank will sell your bitcoin to pay the loan below its loss line. A major financial tool in taking a loan against bitcoin is that the asset has grown on average by 160% a year. If you are paying 5% interest and earning 160% growth, you have made money on the arbitrage at 155%. Aside from the risk (which is a valid concern), it’s almost a no-brainer. Another risk here is that you have to trust the 3rd party crypto bank that is holding/locking your asset.
Taking a loan out for the proceeds while the asset grows in the background is great way to leverage income. And the loan proceeds are tax-free. It’s your money. You borrowed it at a reasonable rate of return, you pay it back in a reasonable amount of time, your asset grows at a higher rate of return historically, and you repeat the cycle.
A few crypto banks..
- Nexo.io – lots of options to earn, up to 13.9% interest to borrow (yikes) but lower if you stake their token.
- Celsius.network – lots of options to earn, loan rates from 1% to 8.95% based on LTV.
- Unchained Capital – tiered loans based on term
- Ledn.io – loan rates on bitcoin at 9.5%, offering the first bitcoin-backed mortgage.
Staking/Farming coins means that you lend out your cryptocurrency for a set time period in return for some or all of the following: receiving interest, earning platform tokens, sharing user/streaming fees based on a percentage of the amount you staked. This provides liquidity to the platform enabling trading to take place. Examples are staking $1,000 in GMI against WETH on Uniswap v3 for 2 months to earn 50% of the 2% streaming fees charged by the platform that your $1,000 used in providing liquidity for the pair proportionally to the other stakers in the liquidity pool. These liquidity pools provide higher APY than traditional interest bearing accounts IRL. I have blended several concepts above regarding staking (platform security, long-term staking, liquidity pools) to describe my use-case. While die-hard DeFi stakers and farmers insist on the difference between staking and farming, I find them similar enough to lump them together in this particular discussion on banking alternatives to earn money. This article by reef.finance is an excellent follow-up on specifics of staking and farming and risks involved.
This part of the crypto world is in its infancy. This is due in large part to IRL banking regulators not knowing how to go about regulating this industry (my very simplistic view). Other than in El Salvador, I am not aware of any fiat/crypto IRL banks – certainly not in the United States yet. However, there are many crypto banks and services that will tie your crypto assets to a debit card so you can pay for items and services using a traditional visa/mastercard debit card. Several of the loan companies above offer their own card as do many crypto exchanges (check out ftx for one).
I’m not going to spend a lot of time on risk. It’s present in crypto markets. These are volatile times. Only borrow or leverage against that which you are willing to lose. Don’t overleverage and risk getting your assets liquidated. Be prudent and stay at 25% or less Loan-to-Value, even though you have the opportunity to leverage 50% (and even the defi trading sites allowing 100x everage (which is insane risk)). Read and study up and be comfortable with your risk profile. A single person in their 20’s has a higher risk threshold than someone in their 50’s with a family. What I do know is 13 years of bitcoin history and that even with the volatility (some extreme), the chart is up and to the right – and I don’t see that changing as we currently are positioned.
I am not a financial planner. And don’t take this as specific financial advice for your situation. I think about income strategies and this type of leverage makes sense to me. I opt out of the traditional fiat dollar world as much as possible and use leverage against crypto as I see fit. It takes time to build a portfolio that has enough value to be leveraged against. I suggest adding a savings plan of buying bitcoin on a regular basis. …And you may never need to leverage against the balance, but it is nice that the option to use it is available without having to ask permission from a banker.
Thoughts? Let me hear them.
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