Yes as the title hints at; I did in fact do something very foolish with a small portion of my bitcoin holdings. But before I actually tell you what you did, I want to explain what my mindset was and hopefully that will help you to understand my thinking much more.
We are in the middle of an incredible bull run. with prices already reaching places we only could dream of just a few short years ago. I have been ecstatic about this; especially every time that I am looking at my portfolio. But then at the same time I am beginning to realize that this bull run has sped up at an incredible rate, and I might not be able to reach my portfolio targets that I had set for myself not only this year, but also for the future.
And this bull run does feel very different. Although, those could be my famous last words as well if I am wrong. I have been preaching for a few months that the market is different, and the game has changed with institutions now having entered the market. I do feel there will always be ups and downs to the market. But with bitcoin, we may not see those 80% drops that have happened in previous years. Almost on a daily basis there is new information about more companies investing into bitcoin, hedge funds also buying and I feel very confident that at the end of the year we will look back at the BTC price of $50,000 and feel that it was cheap. The same goes for Ethereum as well.
This is why I needed to change my approach for accumulating both of these coins. For ethereum I have moved heavily into ethereum mining. There is a heavy initial investment, but there is opportunity to accumulate a significant amount of ethereum at a discounted price compared if you would have spot purchased the same amount of ETH. The drawback is that this will only be viable for 1-2 years; when ETH will abandon proof-of-work and change to a proof-of-stake chain. And then there is EIP 1559 would would also cut into the mining profits if implemented. But even still it would still be a profitable venture. I then will be lending out a high-percentage of my minded ETH to compound my earnings.
But what is my plan for BTC!?
Before I start tell you what I did, I do want to be clear and NOT recommend you to do this as well. It very likely was a stupid decision, but one that I was willing to accept the risks.
I used a small portion of my BTC as collateral and took out a loan on Nexo, and used that to invest into more BTC. Because I don't stake any NEXO tokens on the platform, the interest rate is quite high, over 11%. But as long as bitcoin goes up 11% in the time since my loan it won't have been too stupid of a decision.
Why Did I Do This?
Well as I mentioned before; I truly believe that the price of bitcoin is going to continue rising up in the near term future. Reaching over $110-200k wouldn't be too crazy of a price to see and it could happen sooner than you think. It is already very expensive to purchase a significant amount of BTC, but it's going to become much more difficult, and I viewed this as perhaps my last great opportunity to do so. After using the loan to purchase more bitcoin, I then lent out that bitcoin to earn interest from it. I can easy keep that interest as a passive income, or I can use that to help pay for the loan. Depending on where the price of BTC goes, I will probably do a combination of both.
The Risk?
And this is why you shouldn't do what I did. I did need to use a portion of my bitcoin as collateral for the loan, much more than the amount of USDC that I received. And if bitcoin would have some incredible price drop and I wasn't able to add more collateral, then my original bitcoin collateral could be liquidated. I would like to avoid that. After all, what would the point be of the loan if the collateral which is a higher amount than my loan received was liquidated; it really would defeat the purpose of this endeavor.
How I'm Handling the Risk?
To minimize the risk of this loan I didn't do a crazy percentage of my portfolio size, but enough to be a nice gain for it. I wanted to be ready for any potential risk that could happen. To do this I deposited additional bitcoin into my Nexo account outside my original collateral to increase my safety just incase some unforeseen event would take place. But not only that, I have additional bitcoin ready to add as collateral at an instant if I were to need it.
I also am earning a very nice monthly interest rate from BlockFi in bitcoin, and I plan to withdraw a portion of that every month and add it to my Nexo collateral. I will have so much extra collateral that my risk becomes very minimal.
While I will definitely still continue to dollar-cost-average on a weekly and monthly basis, I just will be doing this in smaller amounts. I'm buying an amount that I would have been buying regardless, but instead am just doing it now. In a bear market I would never recommend this, because odds are that the prices will drop. But I don't see that happening anytime soon.
And thankfully I did this loan soon after the news of Tesla investing into bitcoin and I'm up already higher than my loan interest rate. If bitcoin would stay the same price as today, it would have still been a net positive decision, especially taking into account the interest I will receive by lending it out.
The Process
This was something that was actually quite scary for me. It was scary just how easy it was to be approved for the loan and receive the funds. Literally it was only a few clicks on my smartphone, add the address I wanted the funds sent to, and less than 10 minutes later I had received the money. I could very easily see how this could be very dangerous for gamblers, or people who don't have high self-control. Because of that I highly recommend being careful about doing this.
Something that I really do like about repaying this loan; which I received in USDC, is that you don't have to repay in bitcoin, or USDC. You can repay in any of the coins offered on the Nexo app. Sending USDC can be quite expensive right now with the ethereum transactions fees and would make repaying the loan more expensive if I could only use that asset. But I can use BCH or Litecoin, or other chains that have very low transactions fees and pay with those.
So far I'm very happy with my decision and wish I would have done this much sooner, but hindsight is 20-20. At the end of the day it could end up being a bad decision, but in a way it was also somewhat of an experiment for me too. I have been very curious about testing out these loan systems. These type of services will only become more important and popular as bitcoin and ethereum become more expensive. As it allows you to get cash without selling your assets and taking the tax hit that comes along with it.
Have you ever taken out a loan on one of these services such as BlockFi, Celsius or Nexo?! And what are you doing now to accumulate more Bitcoin while the prices continue to go up!?
As always, thank you for reading!
Good work