So over the last 18 months or so I have been building up my knowledge of crypto’s and I have to say over the last month I have finally started to work out how beyond the simple appreciation in value. These tokens as they are called do have a purpose and once you start to understand this then your eyes do open up to a new world coming. What I discovered this weekend was just how simple it was to borrow against these coins or assets just like we do today if we want to draw equity out of a property. The main biggest difference here was that I borrowed USD against them, at a rate set by the market, not the government. And I was able to do this without giving any ID or indication of who I was. All the system needed to see was my wallet and what asset I was using as collateral.
I’ve built up a few positions in some of these coins which I believe are going to do pretty well. Just like today where we see a property that’s going to go up in value we believe in the asset and want to hold onto it. If the asset gains value then today banks will lend against these in the form of cash. What I failed to realize with my crypto portfolio was the use of stable coins. What these new coins are is basically USD or EUR in some cases which are pegged the value of the USD. If bitcoin and Ethereum we see on the news plunges 20% in horror these coins don’t move they are linked to today’s money, not the new crypto world. I believe these are going to go up in value then borrowing dollars instead of crypto allows me to keep the asset and gain in its appreciation. The example here would be Ethereum, it’s worth around $2000USD at the moment. If I think it’s going to go back to $5000 next year then I can borrow in cash, invest in Ethereum sell in 12 months convert it to $5000USD instead of Ethereum and pay back my original loan and keep the profit. You can swap these USD tokens back into cash any time you want. The best thing about this is that with the rate set by the market I paid only 3% for this.
Today my investment properties have 2 redraw facilities against them using the property itself as collateral. Today that interest rate is 4.4% again that property I own. That gives me a 1.4% saving on what I pay today again on Australian Property! This isn’t to be sneezed at and honestly, let’s so I run and splurge on 1 bitcoin today at $45,000 and it goes to $90,000 by next year. The gain in that bitcoin now gives me a lot of collateral I can borrow again in USD and pay back my investment loans with my current bank and save money. In effect, I would be borrowing in the new crypto world to pay back loans I have in today’s traditional finance world and saving money in the process. This is incredibly powerful and it’s all thanks to the new world of decentralized finance in which there are no banks. The markets and people who use these new lending platforms dictate all the terms and the profit margins that banks collect today are saved. This is going to have a massive impact on banking as we know it today.
This will initially impact the banks and their smaller loans I would imagine like personal loans and perhaps car loans. For those building a small or modest crypto portfolio worth $5000 – $10,000 today, as the assets grow through the adoption of the technology these become worth say $15,000 – $30,000 in 2 – 3 years. You can borrow say $10,000 out of the collateral of those assets at 3% interest and no bank or credit check is needed. This is where the power lies in the new technology. Just like those properties I bought years ago where I was looking for a capital return and then borrowing from the initial gain to buy the next property I can now do this with crypto. This time I don’t need to fight with the bank for the valuation. I don’t need to argue with them about my income and what those payments were on my credit card. It’s all done seamlessly removing so many barriers we have today. The banks must certainly be starting to get worried as to how on earth can they compete with that? Lower rates on assets they don’t believe in than my unit on the gold coast! No 30 minutes to an hour filling out the application form. Following up to see how the process is going, no need for payslips!. It’s scarily easy and again I’m borrowing USD which we can use today for our everyday life!
The biggest risk in this space is a massive fall in the market and the positions that you have in there as collateral. Just like today with a margin loan or even an investment loan on the property, if the asset falls below the value of the loan and the bank finds out then they will seize it and sell out your position to protect themselves. This is no different in the crypto space in that if Ethereum as an example fell 50% to the amount I borrowed against it the platform will sell it on me to cover the loan. It’s all automatic so you need to be confident in the asset itself. The catch is that as this technology I’m writing about gets adopted the more the value of these coins go up driving the asset appreciation. Me personally I can’t see that happening on the very mainstream say top 20 coins. This is a new way of life I see for many in 5 – 10 years. That is unless you like your bank manager and feel like giving him an extra 2% for their charm and smile.
This activity that I did this with over the weekend was done with the following:-
- AAVE was the platform that I connected to and deposited my coins and then borrowed USDC (Coinbase Stablecoin). The platform has also been pushed like billionaire investors such as Mark Cuban.
- Chainlink, Ethereum and Maker were the coins I put up as collateral to borrow against. I believe that all of these platforms will grow over the years ahead as these platforms start to take off.
- Metamask wallet. This is an Ethereum based wallet that I used to connect to AAVE. It was from here that I converted my USDC to other crypto coins meaning that as they appreciate in value I can convert them back to USDC however if they have gone up in value then that is easy money. Heck, I might give this 2 years to work see how it all goes. I’ll pay my 6% interest in that time but if they have gone up 30%, 70% or 100% in that time which are extremely conservative by my count. Then I will make quite a tidy profit.
At the time of writing this article the following prices were recorded:-
AAVE – $330 AUD
LINK (Chainlink) – $25.50 AUD
Ethereum – $2950 AUD
USDC (USD) – $1.31 AUD
CBA (Commonwealth bank of Australia) – $99.49 AUD
WBC (Westpac) – $25.64 AUD