Many people have entertained the idea of using services like Nexo, Celsius or BlockFi to take out a long. But what is the process really like? Is it difficult, and does it take a long time to be approved!? This are all questions that I will be answering for you. As I mentioned in a previous article; I did in fact take out a loan at Nexo to purchase more bitcoin. I will go in depth on how the process went, the positives, negatives, and all the risks involved.
But before I begin, you shouldn't follow my actions and take out a loan. Especially if you don't have the money to pay it back. There is risk involved and you need to be aware that there is a chance of possibly being liquidated. So please be careful.
This was my personal experience with Nexo, and I will walk you through that experience, and also my thought process as well.
How Does it work?
Because I took out a loan at Nexo, that is the situation that I will be talking about. I would assume that both BlockFi and Celsius would work similar, but I could be wrong on that.
To understand this whole concept of taking out a loan with these services; you first need to know how they work. These companies do not provide a loan to people who don't have any money. You must provide collateral for your loans. In fact; you must over collateralize your loans. At Nexo, you are able to receive a loan amount at approximately 70% percent of your loan, and it could be lower than that. Meaning that today if you were to provide 0.03 BTC collateral, you would be able to receive a loan of approximately $1,000 value. When I took out my loan I chose to be paid in USDC.
This heavy collateral protects both Nexo and also the users who lend out their cryptocurrency there to yield interest. The market is very volatile and the collateral that is 30% higher than your received loan amount today, could be worth than that amount tomorrow. This gives Nexo breathing room to be able lessen their risk, and not lose any of their value if the market were to crash. Of course if this were to happen that would result in your collateral being liquidated. And no one wants that.
When the value of your loan collateral drops significantly they will send you an email to warn you; recommending you to add more value to your collateral or to pay back a portion of your loan. But that e-mail isn't very dependable, especially when the markets can drop so quickly. This means that you will need to watch your loan like a hawk and hope that the prices don't dip to your liquidation number.
But like I just mentioned before; you can add extra collateral to lessen your risk. I did just that. I added much more collateral than I needed to. But I took it a step even further. I sent more bitcoin to my lending wallet on Nexo to earn an interest there. But my intention wasn't so much the interest part, but to always have it instantly available to add as extra collateral just incase the market would turn red.
Now let's talk about the interest. If you have a significant amount of NEXO in your account, you can receive a 5.9% loan rate. Not so bad. But if you are like me and didn't have any NEXO in your account, your interest rate becomes 11.9%. A very high amount; especially if you are taking a large loan. The loan is set at a year's length, but if the loan isn't paid off in full by then it is just renewed. You can repay the loan at your own pace and in a variety of different ways. For example, even if you took out a USDC; you are able to repay it in any coin that is available on Nexo.
Why Would You Want a Bitcoin Loan?
This is the magical question. Why would a person want to take out a loan for an amount that is less than the collateral amount that they already have. There are actually many reasons why a person might want decide to do this. The biggest reason is that they need cash, but they don't want to sell your precious bitcoin or other cryptocurrency. If you have made large gains on your coins you would be required to pay capital gains taxes on those profits. Most people would like to avoid this, especially if their intention is to hold on to their coins. Perhaps there is an emergency that came up that requires cash, or maybe they want to pay for a wedding or something important. Everyone has their own reasons.
Or perhaps a person might have incredible conviction in where the prices of bitcoin are going and want to accumulate as much as they possibly can before the prices go even further up. For example, if you were to take out a loan for just over $1,500; you would nearly be able to buy 0.03 BTC at todays BTC prices. But if bitcoin goes up to $150,000 in a few months time, that same $1,500 would only buy you 0.01 BTC. It is a very risky game to play, buy some people do play it. For some, fortunes have been made, but for others this decision has only caused pain and regrets.
But how about me? Why did I decide to take out a bitcoin loan?
I fall into the latter camp that has very strong conviction in where bitcoin is going. Last month when the price of bitcoin was dipping and hovering in the low $30,000's, I had a strong feeling that it would not be there much longer and so I decided to take out a loan at that time. When the price of bitcoin was approximately $34,000 is when I took out a loan of over $5,000 and used all of it to purchase BTC. As things stand right now, it turns out that I had very good timing. A few days later the news of Tesla purchasing bitcoin came out, and price when up from there. Because the price of BTC is up over $50,000 now; that also means the value of the collateral that I provided has also dramatically increased, which has helped lessen the risk of my loan. I have been lucky so far, but that luck could run out at any moment. For example; if I had taken out a loan when the price of BTC was at $57,000 and then proceeded to fall all the way down to $42,000; there could have been a chance of being liquidated. Be careful out there.
The process couldn't have been easier. In fact, it was almost scary just how easy it was. All you need to do is send any crypto that is supported on Nexo to the respective wallet on Nexo. After the funds have been received they will begin earning interest for you on a daily basis. But there will also instantly show you a credit line amount that is available for you. This is the amount that you can take a loan out if you were to use all the funds in that wallet as collateral. I do believe that currently loans at Nexo must be over $500 at a minimum.
Once you have requested a loan it will be sent for approval. In my case, the loan for $5,000 was approved after only a few minutes and then the USDC was sent to my requested address. After about 10 minutes I had received the USDC and had already bought BTC with that money. Also I would assume that if you were trying to loan a much higher amount, it most likely would take longer to be approved.
There are some positives to deciding to take out a loan. Like I mentioned above; a person taking out a loan instead of selling their BTC will not need to pay capital gains tax. And also, I was able to multiply my bitcoin holdings very quickly. Of course the loan will need to be fully repaid until I can finally receive my collateral back.
Not only was I able to receive the money to buy bitcoin today, but I then decided to loan out that amount and collect interest on it, which will net me a little extra BTC. But if I had just loaned out the BTC that I used as collateral I would have been able to receive a higher amount of interest rewards. But the way I looked at it was that the collateral was originally being stored in my Ledger and therefore wasn't yielding any interest. Which means that it didn't cost me any income that I was possibly receiving before the loan.
The Negatives & Risks?
There are quite a few negatives that need to be considered when taking out the loan. First is that you need quite a bit of money to actually take out a loan. In fact you will need more value than the loan that you're requesting. This isn't a loan for people who don't have money or assets. Not only are there quite a bit of funds that are required, but the interest rates are extremely high if you don't have any Nexo. (I didn't) Don't loan out more than you can afford to do so, it can be so easy to fall behind on payments and get stuck in a bad place. For most people it would be better just to use cash and spot purchase instead.
But perhaps the thing that you need to be most aware of is that there is a chance of your funds being liquidated. If the value of your collateral dips down to a certain amount, they will begin to automatically use those funds to repay your loan. I know many of us would be crushed to lose the bitcoin that we worked to hard to accumulate.
And also the last negative is that the large amount of cryptocurrency funds that you do use as collateral will not be able to earn interest while being collateral.
Do I have Regrets?
So after the fact how do I feel about my loan and do I have regrets? Well, at this current point I have no regrets and have been very glad that I decided to do it. But that is only my thinking today and it could change in the future. If the bear market would start and result in BTC dropping to $20,000, I would have regrets. It all is determined by what happens to the price after your loan. If you were lucky like me and the price went up after taking the loan out; you probably wouldn't have any regrets too. But if the price dipped, it would have been a painful experience.
At the end of the day; I have been treating this as an experiment. I have been interested in doing this for a very long time, and reflecting back on it I wish I would have done it sooner. If bitcoin continues to go up a lot further I think this is something many people will want to look into so that they can receive cash, but also to avoid the capital gains tax. When the time comes, I will be happy to having had this experience already.
I would like to again stress the importance that you probably shouldn't do what I decided to do. It is risky. But I hope this article could be of some use to people that were already considering doing this as well.
But how about you? Have you ever taken out a loan with one of these companies? Are you interested in doing so in the future!?
As always, thank you for reading!