Leveraged Stablecoin Lending
Using crypto to fill our pockets
Now Normally, We Wouldn’t Discuss Cryptocurrency…
And that’s mainly due to the fact that it’s not what this newsletter is about. This newsletter is about generating alpha in the markets using proven methods. However, I stumbled upon this interesting concept that appears to be a unique (and mostly stable) method of earning a return within the crypto universe. If you don’t believe in crypto then you can simply skip this newsletter, we’ll be back to more normal investment talk next week.
I am also going to preface this with a warning. Any money you allocate to this should be money you are willing to lose. The lack of historical data on crypto it makes this investment far more speculative. Experts recommend that the average person allocate no more than 5% of their holdings to crypto. If you do carry out this strategy please do not make it your only investment plan.
In The Crypto World There Is Lots of Volatility
For many people its so much that they deem it as “too speculative” and thus not worthy of investment.
This price volatility needs no other explaining than this chart of Bitcoin’s price:
Compare that to the price chart of SPY and you can see that while one lost a third of its value in the last six months, the other lost only a fiftieth.
A lot of this volatility can be attributed to relative newness of cryptocurrencies as well as their (currently) unregulated nature. Cryptocurrency now is like what banks were before the creation of the Fed in 1914. Incredibly unregulated, risky, and with large fortunes to be made.
However, for the average person this isn’t ideal. Most people don’t want to bet the farm on making it big. They would much rather play it safe and build up a nice nest egg over the course of their lives. For us, it is much the same, that is why us (and most investors) stick to mature asset classes like equities and real estate.
But what if we still want a small piece of the action? We don’t have to bet everything, but maybe we can get our slice of this gold rush too.
Let Me Present To You, Leveraged Stablecoin Lending…
Stablecoins solve our problem of volatility in the crypto world. By using fiat backing or algorithmic control, stablecoins are able to peg their value to $1 (give or take a fraction of a fraction of a penny).
A few common ones are USDC, USDT, and UST.
But now you might be wondering, if their value is pegged to a dollar how do we make any money? There’s no price appreciation.
And that is completely correct, we don’t make our money on price appreciation, where we make our money is on the lending side. People pay us to borrow USDC, or USDT, or UST just like we were a bank. With cryptocurrency, peer to peer lending becomes secure enough to be trustworthy due to “smart-contracts.” These are small bits of code that run without any oversight, meaning that we can set up “trustless” contracts because the terms are not dependent upon the individual, but rather the code, which is publicly accessible, and completely unchangeable once uploaded to the blockchain.
On top of that, if you’re still nervous about the stability of “stablecoins,” USDC’s parent organization regularly undergoes audits and keeps its reserves completely transparent so that you can see it actually is backed by the dollar.
This is one of the largest stablecoins on the market today and is even partnered with Coinbase, a multibillion dollar publicly traded company.
So Now That We Know That We Can Lend Stablecoins, How Do We Do It?
First we need to know where we can lend stablecoins in the first place. Even though you will act as the bank you still generally need to go through a medium to find people who want to borrow.
Luckily, there are many reputable organizations that will let you do this like BlockFi. All you need to do is open a wallet with them and then deposit money to convert into USDC.
If you’re not sure how to do it I found this helpful Youtube video that should walk you through the process.
Then locking up your USDC for lending is as easy as 1,2,3.
You can then earn 6-7.25% on amounts under $5,000,000 USD.
But Now Comes The Secret Sauce…
We use leverage to pump up our returns! At 3x leverage we can be making over 21% annually!
But how do we get cheap enough leverage that it’s worth borrowing? How can we lend out for 7% and borrow for less than that?
This is where we turn back to one of our previous articles. What we can do is this:
borrow against our stock holdings in our brokerage using a margin loan directly from the broker (or a box spread like our article outlines).
pull that borrowed money out of the brokerage.
then deposit it into our crypto wallet to lend.
Say we have 100k in a brokerage account and 10k already on BlockFi to be lent. We can get a margin loan for 20k (20% of our account) and then invest it into BlockFi for 3x leverage on our crypto lending.
Since this leverage is collateralized by our equity holdings, we can achieve a super low interest rate, and on top of that, since we’re only borrowing against 20% of the account, our equity holdings would have to fall more than 60% to get margin called. To me, that sounds like a fairly safe LTV considering that even during the Financial Crisis of 2008 the overall market did not fall any further than 50%.
The other great thing about this is that is when it’s broken down, it is simply an interest rate arbitrage strategy. Since we have enough assets in our brokerage account we can borrow money and then turn around and borrow that money out for even more because our access to leverage is reserved for to individuals with lots of money in a brokerage account.
Hint hint, the people we are borrowing to most likely don’t have hundreds of thousands in a brokerage account.
Our edge that we have is based on an access problem. We have access to something that others don’t, so they need to pay us a premium to get it.
Still, even with that said, this strategy might seem too risky for some due to the newness of cryptocurrency and the fact that the space is unregulated.
Personally, I still think that with proper position sizing this has a greater reward than risk and I think it should warrant further investigation by us as investors.
If you liked or disliked the strategy or have any thoughts about it please drop them in the comments below. I will be answering all of them!
And If you found this article interesting, please take a moment to share it with a friend! We’re sure they’ll enjoy it too.
With that said…
Until Next Time!
Disclaimer:
All content is for discussion, entertainment, and illustrative purposes only and should not be construed as professional financial advice, solicitation, or recommendation to buy or sell any securities, notwithstanding anything stated.
There are risks associated with investing in securities. Loss of principal is possible. Some high-risk investments may use leverage, which could accentuate losses. Foreign investing involves special risks, including a greater volatility and political, economic and currency risks and differences in accounting methods. Past performance is not a predictor of future investment performance.
Should you need such advice, consult a licensed financial advisor, legal advisor, or tax advisor.
All views expressed are personal opinion and are subject to change without responsibility to update views. No guarantee is given regarding the accuracy of information on this post