While I don’t think we’re going into a full-fledged crypto bear market,
this strategy is still a great way to acquire more coins amidst market drops
and short-term volatility. In recent weeks, I’ve personally used crypto loans to add $5,000
of crypto to my portfolio without investing any additional cash. When the market recovers,
this should make my portfolio rebound even harder for additional profit.
In this video, I’ll show you exactly how you can use this crypto loan strategy
to make money when the market drops. I’ll also show you how I like to reduce risk along the way,
because it can be very dangerous if you don’t go about it properly.
Of course, there will be an opportunity cost here depending on where you hold your crypto,
so I’ll explain what that looks like and what returns you should be looking for to make this
strategy worth it. Finally, I’ll walk you through each of the loans I took out, where I put the
proceeds and why. Let’s take a look. My Crypto Loan Strategy
My crypto loan strategy is fairly straightforward.
I take out loans against my crypto assets to buy additional crypto when prices are low.
This starts with locking up crypto in exchange for a loan. The loan is paid to me in the form
of stablecoins, which I will trade into crypto to take advantage of low prices.
When prices go back up, I will sell some or all of that crypto to pay back the stablecoin
loan and keep the profit, which means I’ll end up with more coins than I started with.
There are a few things you need to know or be aware of to do this strategy.
First, you have to understand crypto backed loans. I have a full video breaking down the
many ways to use crypto loans if you want to go in-depth, but here are the basics.
With a crypto loan, you lock up your crypto in exchange for cash or stablecoins.
The amount of cash you can take out against your loan is directly tied to
the value of your cryptocurrency assets. This relationship is called loan-to-value, or LTV,
and is represented as a percentage. With a 50% LTV, for example, you can take out a loan worth
50% of your crypto assets. So if you have $10,000 worth of crypto, you could take out a $5,000 loan
against it. Common LTV ratios among the leading borrowing platforms range from 20 to 50%.
Crypto loans are great because they’re near-instant, don’t require credit checks,
and are non-taxable events, so you won’t owe any taxes on the stablecoins or cash you receive.
You will owe taxes if you trade and make profits, but we’ll get into that shortly.
In the meantime, your crypto remains locked up until you pay off your loan. Fortunately, it
will still appreciate with the market so you won’t miss out on any gains while you have it locked up.
The drawbacks or risks to consider with crypto loans are first that you will owe interest on your
loan amount. This can range from 0 to 15% or so, which you’ll typically pay in monthly intervals.
You’ll often get a lower interest rate using lower LTV ratios,
but it’s an important cost to consider nonetheless. And most importantly,
crypto loans come with the risk of liquidation. When taking out a loan, you’ll be given a margin
call value. This basically says, if the crypto you locked up falls to a certain price point,
the lender will automatically sell some of your crypto to cover your loan amount.
Again, this will be lower with lower LTV ratios, but it’s probably the biggest risk to be aware of.
If you use these loans irresponsibly, you could end up losing quite a bit of money.
How I Reduce Risk So here’s how I keep
my risk as low as possible with crypto loans to maximize my chances of success.
First, I use Celsius Network for all of my crypto loans - they have rates, features and benefits
that make it the best choice for borrowing, and you’ll see how it all comes together in a moment.
When taking out a loan, I stick to the lowest LTV ratio - and on Celsius, that’s 25%.
This limits the dollar amount I can borrow, but it keeps me much more protected from the risk
of higher LTV ratios. For example, 25% LTV loans come with just a 1% interest rate. This means it’s
practically free to borrow, and I have to make very little money to make up for the cost and
finish with a net profit. Additionally, these 25% loans have much lower margin call levels.
At a Bitcoin price of $36,000, a 25% LTV loan has a margin call at $13,800, while a 50% LTV
loan has a margin call at $27,700. These levels are particularly important if you’re trying
to do this strategy in a dip, crash or bear market, because if the market keeps dropping,
you don’t want to be stuck with a loan at a high LTV ratio. If you are, you may end up having to
sell crypto at a loss just to satisfy the loan requirements, which ruins this whole strategy.
Next, I almost exclusively use Bitcoin as collateral for loans. Most platforms,
including Celsius, accept a variety of assets as collateral. However, Bitcoin is pretty often the
least volatile cryptocurrency, which means I feel confident it will not approach margin call levels,
especially at 25% LTV. Other currencies may be more volatile, bringing more risk to the strategy.
A few important features to note about Celsius, which also play a role in risk reduction,
are that their interest payments are interest only & their loans can be extended at any time.
Interest only payments means you only repay the interest costs, 1% in my case, and you aren’t
responsible for paying back the full loan amount or principal until the loan reaches maturity. And
since you can extend this loan any time, as long as you can afford the 1% interest payments, you
can pretty much keep these loans out indefinitely. So if it takes longer than expected to make a
profit from your loan proceeds, maybe the market doesn’t recover as fast as you think it will,
you can just bump the loan back without any additional fees or risks.
Finally, to reduce my risk even further, I have been putting my loan proceeds into investments
that earn yield or income. This way, even if the price of those investments go down,
they are producing enough income to pay off my monthly interest and I can keep those loans
active as long as I need to. Opportunity Cost
The last thing you may want to consider is the opportunity cost of taking out a loan. Since your
crypto will remain locked up, you don’t have to worry about missing out on gains unless you were
going to trade it in the first place. Instead, the opportunity cost will be made up of the interest
costs and any missed interest you could be earning by holding in an app like Celsius.
Let’s look at a balance of $1,000 in Bitcoin as an example. On Celsius, you could be earning 6.2%
APY on this balance. This isn’t a perfect measurement because the interest is paid
in reference to Bitcoin satoshis and not dollar value, but it’ll give us something to go off of
for a quick calculation. We’ll also add the cost of interest onto this, because you could be saving
that cost by not taking out a loan. The cost of interest will be the LTV ratio multiplied by the
interest rate. With a 1% loan at 25% LTV, this would be an additional .25% for a total of 6.45%.
This means to profit off of the crypto loans strategy, we need to beat that 6.45%
with our returns. However, the tricky part is that we will be working with
less capital. So we’ll need to divide this by the LTV ratio to figure out how
much we need to make. In this case, we’ll have one-quarter of the capital to work with a 25%
LTV ratio, meaning we need to make four times that return - or 24.8%. This is because we need
to make almost a 26% return on $250 to match the gains we would achieve by making 6.2% on $1,000.
You may also want to consider taxes, which could range from 10 to 37% on short term capital gains
depending on your income bracket, or 0 to 20% on long-term gains.
I’m going to estimate short-term gains, which based on my income will fall into the 22 to 24%
range - I’ll calculate 25% to keep things simple.
This means to profit off of the crypto loans strategy, I need to see at least a 34.4% return
on my loan proceeds. Approximately 25% of this would go to taxes, leaving me with just that 25.8%
returns that would equate to not doing anything at all. So you may want to run these calculations
with your own LTV figures and tax rates, but I know I need to see above a 35% return with my loan
proceeds to make this all worth it. My Active Crypto Loans
Before getting into my own specific loans, I want to emphasize this is a risky strategy
and you should weigh the risks carefully before jumping in. Even though I put my loan proceeds
into assets that I’m highly confident in, it’s still gotten pretty ugly. As
you’re about to see, I’ve made some poor choices and am down on most of my loans,
which just comes with the territory of trying to catch falling prices in the market.
But here’s the breakdown of the 5 loans I’ve taken out since November and what I did with them.
For loan number 1, I locked up $12,000 of Bitcoin for a $3,000 loan.
This is probably the highest Bitcoin price I took out a loan at,
but with margin call set at about $22,000, I still feel pretty snug with this one.
The downside is, I put that all into LGCY network when I thought it was “dipping” at about 1¢.
I still feel great about LGCY long-term, and have faith it’ll recover this year, but it does hurt
to see it sitting around .3¢ lately, which is a 70% loss on that loan. Again, thanks to low
interest costs and the ability to extend my loan whenever, I’m in no hurry to close this out. In
fact, I’ve been liquidity mining with my legacy tokens on Sifchain, where I’ve been earning 300%
APR, compounded each week. Definitely check out my video on how to do that if you’re interested, the
DEX supports a lot of different tokens and it’s been a great source of income for me recently.
But this is clearly more than enough to cover my monthly interest, so I’m just waiting it out.
After this, I got really aggressive with buying the Celsius Network CEL token.
It yields over 5% in the Celsius app, it’s deflationary and it’s got a whole
lot more going for it, which you can learn about in my full video on it.
So, loans 2, 3 and 4 were locking up $8,000 of additional Bitcoin and putting all $2,000
of the proceeds into the Celsius token. I was buying it from $4 down to below $3, and while
I am still down on it, I’m very optimistic for Celsius this year and beyond. Again, I didn’t
expect to flip these within a few weeks, but I knew with the cost of borrowing so low, I could
afford to wait patiently several weeks, or more likely months, for the price to recover. No one
can time the market perfectly, so you just have to brace yourself for further dips along the way with
this strategy. That’s why using lower risk loans is so important, because we can just wait it out.
Finally, loan number 5 was locking up $3,000 of CEL token for $750, which I put right back
into CEL token. I’m not particularly proud of this one, because I leveraged tokens that I previously
bought with leverage, which is not a very safe strategy at all. But, CEL token dipped below $3,
and given my confidence in it long-term I could not pass up the price. Of course, it continued to
dip to almost $2 afterwards, so I’m still down on this one too. Unfortunately, in locking up my CEL
tokens that I purchased previously, I’m no longer earning interest on them every week in Celsius.
For this reason, I will probably look to pay this one back before anything else so I can continue
earning weekly CEL rewards and give myself a little extra buffer on those interest costs.
While my loans aren’t going incredibly well yet, when the market returns to previous highs
I know I will make more than enough profit to pay back these loans and secure some
extra coins in the process. So hopefully this helps show you guys how you can use
loans to strategically boost your returns when the market isn’t looking so good.
For more details on crypto loans or the step-by-step process of taking one out at Celsius,
check out this video right here. Leave me a comment if you have any questions,
and I’ll see you in the next one.