I saw this tweet the other day, did some quick math in my head, and wondered if what “Dr. Satoshi” was doing made sense:
Let’s break this down.
Celsius is the “Unbank”. Their business model is to be sit in between depositors and buyers of cryptocurrencies, facilitate loans, and reward depositors with higher interest than a legacy/fiat bank. They do this all while having increased transparency so you know what they’re up to.
Celsius are running a special:
The important point for the sake of this breakdown is that bottom line — 25% LTV. LTV stands for “loan to value” and that means that you have to have 4x the amount of cryptocurrency on deposit against which can be borrowed.
“Dr. Satoshi” above borrowed 1,000 USDC (US dollar coins, essentially $1,000), which means he has to have $4,000 worth of crypto on deposit in order to borrow that $1,000.
Celsius pays interest on crypto holdings that are not used to secure a loan. It does not pay when the crypto is used to secure a loan. In a later tweet “Dr. Satoshi” shares that they’re using BTC (bitcoin) to secure the loan, a quick glance at their current rates shows that s/he could earn about 4% on their holdings (Celsius rates vary week-to-week).
“Dr. Satoshi” is excited to earn about 10% on their 1000 USDC loan. Rounding the rates to assume no compounding and that rates are the expected annual yield… they’d earn about 100 USDC over the year.
However, they’re paying 1% on the loan, which means they’re earning 90 USDC (it’s 1% on the 1,000 USD borrowed).
And, they’re forfeiting 4% interest on $4000 worth of crypto that’s used as collateral for the loan. That’s $160.
So, they’re forfeiting $160 in income to earn $90, while taking on the risk that their loan gets called if their collateral value drops. A 25% loan to value is kinda conservative, but cryptocurrencies are volatile; in any case it’s more risk than not taking the loan.
With more risk, the investor should expect more reward. Only in this case, they’re losing money!
Obviously, “Dr. Satoshi” expects their investment in RealT to increase more than the amount they’re losing in the interest arbitrage.
Also, they might be doing this (as I would) to learn — how does a loan work? how does RealT work? and in that case… the small amount they’re “losing” is not a loss, but an investment in education. It’s how I would do it, because I learn by doing and through experience.
Or, they might be doing it to diversify their holdings. Now, instead of just the bitcoin they used as collateral, they have two holdings: bitcoin and the tokenized real estate.
Why would one take a loan against holdings then, instead of selling? Not the point of this post, but here are some bullets:
- Avoid capital gains tax because there’s no sale of assets. Maybe you want to sell over a few separate tax years to minimize taxes by staying in a lower bracket, or simply to pay taxes over a couple of different years. (Disclosure: This is not tax advice!)
- Continue to be exposed to upside while being able to cash out some to spend (you’d do this if you were long-term bullish and wanted to keep the investment in play, while at the same time increasing your quality of life).
- To diversify… maybe you hold BTC and it’s appreciated a lot, and you want to say, buy a home. You don’t want to sell (because of capital gains and because you’re long-term bullish) but you need capital as a downpayment for the home.
- And of course, my favorite (and something I strongly recommend if you’re curious about this space), they did it to learn something new. What is it like to take a loan? How does it work? When I did it, was there anything that happened that I didn’t expect? What can I learn about RealT? Etc.
Anyways, not an example of my best writing, but I hope a useful example of how to think through a decision like this for yourself. Questions/comments are welcome below, but please keep them positive/constructive.