Playing The Dangerous Loan Game

in LeoFinance2 months ago

Hey Jessavers

Before I begin, I want to cover my ass; this isn’t financial advice. This is just me looking at the math on certain financial products and presenting it for informational purposes. If you are taking financial advice from random bloggers online, you shouldn’t be surprised if you lose your money.

All I am doing is sharing my thoughts and tactics I am looking at as a crypto holder.

I recently spoke about the tax implications for those who have been buying crypto and want to cash out and the option of taking out a loan against your cryptocurrency assets.

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Having counterparty liabilities

I did review the potential cost saving on taking a loan versus selling your crypto, but what I didn’t speak about was the liability you have to deal with when taking a loan.

When selling your crypto after paying your taxable amount, you have your cash clean and clear, do whatever you want to do.

When you take a loan, there’s still a balance that needs to be repaid, or you would lose your collateral.

Also, if you’re loan to value ratio breaks as the price of crypto tanks. You will be margin called to post more collateral to maintain the loan value ratio or extend the repayment period.

All this can be a bit of a headache in terms of admin when compared to straight sales.

High borrowing costs

Another issue with taking out a crypto loan is the high-interest rate on borrowing. Suppose we look at the rates given to us by popular CE-FI companies proving crypto-backed loans. You can see the rates are pretty steep when compared to legacy financial products.

PlatformAssetInterest rate for a year
CelsiusBTC8.95%
BlockFiBTC11.24%
NexoBTC11.9%

Paying such obscene rates on a short term loan may not be that painful, but surely reducing your loan repayment value could net you some extra income.

So it got me thinking, what if you took out a loan against your Bitcoin, then refinanced it by taking out a second loan with your bank.

Paying back your crypto loan in full and settling it to avoid the interest payment and then paying the lower rate back to your local bank.

Comparing rates with my local banks

I did some digging as to local banks term loans; these are unsecured loans you can take out just because you have an income.

BankRepayment periodInterest rate
Standard Bank12 months24.50%
FNB12 months12.75%
Absa12 months18%
Nedbank12 months18%

Running the numbers

Let’s go back to my old calculation using a $5000 fee; if I took out a $5000 loan straight with these companies, I actually get a better rate than a personal loan with a SouthA African bank.

South Africa may not be the best option, but there is defiantly a viable cost-saving available.

In my case, taking a glance at the products I have available locally, an overdraft facility at 8.50% would be the best rate.

I would also need to factor in things like the monthly service fee for keeping the loan open and the Once-off initiation fee for opening the loan, which will eat into my margins.

Effectively for me, borrowing against my crypto is a far better deal than any of the local loan products I can use with traditional banks.

If we compare it to the likes of the US, UK and Europe, where interest rates are absurdly low, you could refinance your crypto loan with a traditional loan.

I personally just pulled some UK banks rates, and you can get access to a personal loan at 3.0% APR. 595 basis points lower than the best rate you can get when borrowing against your Bitcoin.

Loan arbitrage in a tokenised world

Now here is where I think it gets interesting. Imagine for a second loan could be packaged up and sold in the open market. Let’s say I would like to refinance my crypto loan, but the South African bank arbitrage with their interest rates isn’t that great.

Imagine I could instead buy out a from someone in another country with a lower interest rate. Let’s say the UK and I get a 1% interest rate.

I could then take out the crypto loan, take the balance, use it to buy someone else’s loan, and repay that lower rate instead of my rate.

Imagine how quickly that would balance out interest rates across banks, fintech companies and countries. People who want better savings rates could save in other countries bank accounts while looking to borrow. Instead, you could buy other citizens loans.

Have your say

What do you good people of HIVE think?

So have at it, my Jessies! If you don't have something to comment, "I am a Jessie."

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This is an interesting thought 😀
So I can payoff my car loan this way.
Should do all the math myself as back interest rates are very different from country to country
Thanks for sharing

Lol, good luck, I am still researching the best loan deals and what I am in for before I dive in, I'll try make a small loan and see what happens. My issue is if im paid in stable coins I also lose on ETH fees so theres other factors to consider too

Thanks for clearing up how it works. You mentioned UK interest rates but with Celsius, we can actually get 0% interest on loans there in the UK so I think for smaller amounts, it can work out pretty well to pay back. If you're able to pay back larger amounts then that's also a good option but to get a deposit together for a house with a short term loan might be a tall order. Will need to run some calculations but could use crypto loans to pay back mortgages quicker which is an additional incentive not to sell crypto!

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Lol I just took what the first links data gave me on UK rates, but damn 0% is stupid low lol. You could really work the system with that kind of spread. As these crypto loan platforms get better you may not even need to pay back the loan in full.

Let's say you borrowed against your BTC for 5 years and the price of BTC goes up each year your loan value gets smaller so your rate gets lower plus you paying it back with cheaper inflated fiat.

If your BTC crashes you can always post more collateral and keep it open and use those extra losses as a tax write off.

If I would leverage BTC for a loan in the future i'd want to acquire something like rental properties and just let that cash flow service all the obligations

Haha yeah you can definitely bounce your crypto off these different platforms if you can play it right!

Perhaps the time to get a long loan is during the bear market so that when you pay your loan back in the coming years, it will be ready in time for the next bull run... I'll try with small amounts first to get familiar with the process but damn, can see cashflows kicking off with rental properties on top of the crypto flows... waterfalls everywhere!

Sounds like a plan, in the bear market and also if you got a bit of collateral to spare as you collected some good interest then you can afford to mess around a bit.

If you got a good yield farming operation going then it’s great to offset your gains against that loan.

I think long term loans will only roll out once we deep into the trillion dollar market cap level

Does Leo Finance tax you?

Sorry. Not sure what you're asking here - can you elaborate?

I was asking about what the rules on the Leo Finance community might be for people not posting via Leo Finance, like me. I am on Hive Blog. I sometimes use PeakD and not the Leo Finance app.

Ummm... not sure, as far as I know, if you don't do your original post from leofinance and just use the #leofinance, you receive 90% of the rewards vs 100%. Don't know how it works for comments. You might be best asking on the leofinance posts or in their Discord

How is that even possible? It is possible if you post from their app. I don't think it is possible outside of the app because it requires some of the permissions in order to do that.


So, when log into the Leo Finance app, they may tell you and show you how it automatically reroutes some of the rewards to compensate for the taxes. The only way it would work via the Hive Blog app is if Hive Blog has the same system in place to distribute the taxes from the users to reroute to the different apps.


I'm not aware of the Hive Blog app of having that implementation. Once upon a time, some apps or all the apps did not do that outside of the particular apps at question. Note that I'm talking about apps and not merely just tags or hashtags or even community group hives. Last time I checked, I have not seen Steemit do it back a year or two ago.


In 2020, as many people moved over to the Hive Blog blockchain, I have not seen the Hive App reroute rewards to pay taxes to other apps. I will be surprised if they do that.

Sorry, I don't know. You should ask these questions to the team in their Discord to find out:

https://discord.gg/7tTTTcBjH5

Thanks.

It certainly makes more sense typically to take loans from other places for the long term. In the United States a lot of times you can do 0% interest credit cards for 12 or 18 months and you can do credit card convenience checks with those.

At some point we are leveraged out far enough we can't get those and we are the wretched and the forgotten so we have to do the crypto loan option! Lol

I was even looking at taking a USDC loan on Venus to make some additional moves in the short term.

0% is nuts, i'd be borrowing my ass off making smaller trades pocketing the spread and giving back the money and re-doing it over and over and making risk free gains.

Have you checked out peer to peer lending like hodl hodl? There you can set your own rates so no need to be subjected to the platform smoothing out rates and taking their cut and still trading your coins for extra profit

I haven't heard of HODL HODL. I will check it out now.

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That's pretty cool. I don't know why they didn't make it with more than just Bitcoin. With the high fees it makes it really tough.

But yeah the 0% interest for 12 to 18 months is awesome. And a lot of times you get a sign up bonus. So if you spend $3000 in the first three months you can oftentimes get $300 for it. It is like extra income just signing up for all these cards. I'm pretty tapped out though in some respects. I would need to take some crypto and pay down some balances and reset the deck.

They have been giving away new cars like Haloween candy here in the United States as well with the pandemic. It is ridiculous. Like 0% interest for 36 months and crazy stuff.

The most insane thing is they would look at a guy like me as if I was a street tweaker who isn't qualified but then they would look at a 19 year old working fast food and they would be qualified. Unreal.

I have never made car payments. I have always bought older cars all cash but now the interest rates and deals are so low that it is hard to justify tying capital up.

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There's also a significant exchange rate risk with borrowing in crypto and using it for fiat transactions. Of course if crypto goes to hell then the borrower wins.

I am not sure what you mean, could you explain lol

No worries. It is similar to foreign currency denominated loans. E.g. if they have to repay a loan in a year's time and the price of Bitcoin is now $100,000.

But that's not how BTC loans work, you only using it as collateral for a fiat amount. So if you wanted a 100k loan you'd put in 4 BTC now and then you can get 100k. If BTC drops you may need to post additional collateral if it breaks your loan to value ratio

But you'll always just have to pay the 100k+ interest back, regardless if the price goes up, if the price goes up its even better because you can refinance at a better LTV ratio and get a better rate

Ah I see, thanks for clearing that up for me. So in yhis case it's worse if btc falls.

Yes correct, if BTC falls you;re on the hook for adding more collateral, but there are several options.

Let's say you added 1 BTC and you got $25 000 on a LTV of 50%

If BTC keeps dropping lets say to $25 000 each

  • Add more BTC to keep the value at 50% collateral so you'll need to add another 1 BTC
  • You can also pay back a portion of the loan faster and reduce the payments
  • Or you can extend the loan on a higher collateral level and pay a higher interest rate

So there are options so you can avoid margin calls and losing your BTC, but yeah its not without risk and you need to have done your homework

I don't really understand how the lending works in the CE-FI. In case you are default how they gonna force you to pay?

Having a loan is a bit stressing, I am not that confident to borrow something in crypto just yet. Maybe I will stick to the real bank loan at the moment while building my self to a loan free by crypto.

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That's because you're thinking of a fractional reserve loan arrangement that we have in fiat, in crypto you need to provide collateral. So if I wanted a $25 000 today I need to put up 1 BTC as collateral and lock it into escrow. When I pay the loan back, I get my BTC back, if I don't pay the loan back, my collateral is liquidated to may the borrower + interest.

I understand, it's not something you should take lightly or mess around with if you're not sure, but its a product that will become normalised over time, its the same thing the rich do with their assets. They borrow against their stock or retail portfolios all the time

thank you so much for the explanation. Now I understand a bit about how it works. Because at first I think it doesn't need any collateral into the agreement or the transaction.

Well it just kind like putting the land certificate in to the bank, when you want to borrow from the bank. But with so much easier and faster isn't it?
at the moment i think i have to stay away from it. maybe next time when i have some BTC to put into collateral, or when i really do need some fast loan.

Yes, I would say it's pretty much the same as borrowing against your home or if you have stocks you can borrow against it in your brokerage account. Yes it's much faster and easier but many people don't need it right now, I think its more a product we would use once we're deep into the trillion-dollar market cap

I'm just not into the idea of taking on debt except as an absolute emergency. Doing it to try to profit from some sort of arbitrage strikes me as insanely risky... just not gonna go there. I'm sure some people will, though...

=^..^=

The fact that we can pocket interest in crypto is because people are taking out debt, I don't see debt as a bad thing if you're spending it on assets. Sure emergencies are also a good idea, but I'm happy to take a loan so I can secure another set of cash flow or to reduce my tax obligation.

In fact, loans can be more profitable than selling your crypto in certain situations, but it really isn't for everyone. You have to do your homework on the options and pick the right one for your situaton