Interest payments for crypto (>3%) or USD Stablecoins (>8%)

Investing / Cryptocurrencies
15

So it’s borrowing against an extremely volatile asset, no wonder the rates are high :slight_smile: I definitely wouldn’t count as a guaranteed return. Anyway as usual make sure you understand where the extra return comes from, there’s no free lunch.

This part I am sure, the intermediary did the math and are always the winners :slight_smile:

16

I read only a few headlines so I am not 100% sure on what I am about to say but would love it if you guys could share some resources.

If I understand it correctly people are pledging their bitcoin/other crypto assets and getting 60-80% USD/crypto of the pledged value.

What happens if we see a 30% correction? Is there a margin call?

17

Yes, exactly they would do a margin call and sell their collateral.

The CEO talks about it in more detail here: Bitcoin Lending and Borrowing w/ Blockfi's Zac Prince & Mark Yusko

18

I give you a random example to make it simple:

  • You want to borrow 50k USD in a stablecoin of your choice
  • You will put your btc as a collateral to secure the lender (let’s assume the btc is worth $50k too)
  • But to provide extra reassurance to the lender and because of the volatility, you will put 1.5x the amount you are trying to borrow
  • if there is an important correction and you collateral is decreasing in value, either you will be ask to add some more btc or the deal will be terminated and the lender will receive the right amount of btc as a compensation.

There is no surprise, everything is transparent and agreed with contract terms. You get notification if the ratio collateral / amount borrowed is decreasing.

19

And as a volatile asset, what if this moves too quickly to close the margin positions? From what I’ve seen of all those platform they obviously make not guarantee you’ll see 100% of the amount you lend (if they do, please point to the ToS I’d be interested to see how that works, while still providing such a high interest rate, since it would be kinda making it free money at no risk which breaks a lot of finance).

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20

So that just the platform I am personally using, I guess Blockfi is similar in nature. You can check the forces liquidation close here: Liquidation

As a lender you are protected by the over collateralization and the liquidation mechanism.

21

Didn’t the dollar lose around 10% against CHF last year? If the inflation stays at the current levels 8.6% is not even a good deal.

22

That’s the beauty of it, borrow USD to buy more bitcoin and pay the interest rate in CHF thanks to your salary.

Edit: I am speaking about borrowing vs btc in general

23

Well I have USD, CHF and EUR.

24

I agree, please correct the title since the 8% interest is not given on “US dollars” but on USDC, which is a pretty important difference.

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25

et voila! done :slight_smile:

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26

And let’s not forget minus USD-USDC conversion fees (and back, I assume).

27

Hi @Oliv, it’s interesting… I’m trying to see what would happen in a market swing, can you make a numerical example with the LTV?

When creating an Offer, Lend at Hodl Hodl offers its customers the choice of an LTV ratio between 30% and 70% for fiat-equivalent Stablecoins, and a fixed LTV of 80% for WBTC.

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28

Sure, here is a simple explanation. You are alerted at 75% 80% 85% and 90%:

LTV ratio determines the relative amount of the collateral the Borrower will need to lock in escrow in order to proceed. Higher LTV ratio entails a higher risk of contract liquidation. LTV is calculated by dividing the debt amount (including interest) by the LTV % chosen.

Example 1. Input: 30% LTV, 100 USDC, 3% Interest rate. Collateral amount: (100+3%)/30%=343 USDC (to be converted into BTC at the current exchange rate)

Example 2. Input: 70% LTV, 100 USDC, 3% Interest rate. Collateral amount: (100+3%)/70%=147 USDC (to be converted into BTC at the current exchange rate)

For the Forced liquidation to occur, LTV has to reach 90%.

29

Fairly minor cost if you use kraken :grin:

31

Thanks!
I’m unfortunately not able to check this week, but perhaps you already did… are there instances where the market swing is so severe (e.g. drop in value) that between 70% LTV and forced liquidation (90%) occurs within a day or so?

In such cases, wouldn’t it be an exposure from the side of the lender? i.e. forced liquidation doesn’t returns your capital because by then the collateral value is already lower than borrowed amount?

32

Theoretically yes, but that’s also why it is triggered at 90%, so that you have 10% buffer. If it is triggered I believe you will have the btc collateral in less than an hour.

33

So, I’ve been giving the topic some consideration, and may have found the right use case… tax money.

See this post:

34

Quick update : I moved a bunch of money in and out without any issues. Still very happy with Blockfi

35

What’s even weirder with those return is that people seem to pay to get other people to hold bitcoin for them.

from Money Stuff: Maybe SPACs Are Really IPOs - Bloomberg

What this means is that in theory (I stress, in theory) you could go long spot Bitcoin, while shorting the December future, and if you just wait for the two to converge then that’s an easy 8% return in 12 months.