🤑 Borrowing Against Your Bitcoin
FIRE BTC Issue #12 - My thoughts on leveraging your BTC stack
Reaching financial independence mean building a savings portfolio large enough to sustain your expenses without reliance on income from a job.
When pursuing FIRE, we spend years stacking assets like stocks and bitcoin to reach this critical mass. Once obtained, the standard and most simple way to live off your portfolio is to sell these assets slowly, at about 4% per year (the 4% rule).
This method eats away at your asset base, but if the value of those assets grows faster than the amount you’re drawing, it will be enough to cover you for the rest of your life, with some left over.
Of course, there are downsides to this traditional method. Firstly, selling an asset is a taxable event. The taxes paid on capital gains creates an extra drag on your savings portfolio that must be accounted for in your annual expenses. Secondly, reducing your asset base is not ideal from a wealth generation standpoint, because it reduces the compounding effect you receive. This means you’ll end up with a smaller portfolio to pass to your family, and could even put your retirement at risk if your expenses are higher than anticipated or your returns are lower than anticipated.
Is there another option? Maybe.
An exciting and interesting idea is to borrow against these assets instead. “Never sell your bitcoin” is a common refrain, which even President Trump stated boldly at the Bitcoin 2024 conference earlier this year.
I’m asked about this idea a lot, so I thought I’d share some thoughts.
Before I do, a couple of disclaimers:
THIS IS NOT FINANCIAL ADVICE. I feel the need to reiterate this, even though it’s plastered at the end of every newsletter, etc. Do your own research and due diligence, and speak to a professional when seeking direct advice.
I work for Unchained, the leading bitcoin financial services company. We offer (among other things) commercial bitcoin-backed loans to entities for business and investment purposes. These are not consumer loans, but if the previous description potentially fits, feel free to schedule a complimentary consultation to speak with a member of our sales team.
With that out of the way, let’s get into it!
🤔 To sell or to borrow…
The current financial system, being built on a foundation of debt, affords us an opportunity to get wealthier more quickly by taking on leverage. There is some risk involved, so it must be done carefully. Such is life…
Borrowing against the assets you own to buy more assets enables you to take advantage of unavoidable dollar debasement. It’s like using the fiat monetary system’s weight against it and in your favor. I dubbed this Aikido Finance in issue #9 of the newsletter, where I described this process using mortgages as a very common example of the concept.
💣 Speculative Attack
We live in a world of credit-based money. Dollars are created from new debt and destroyed when debt is extinguished.
If you’ve been stacking bitcoin through your FIRE journey, and you reach financial independence, you may get to a point where you need to begin living off the value of your savings portfolio.
Instead of selling the accumulated bitcoin to cover your expenses, you may consider borrowing against its value instead. Doing so allows you to access dollars now, while delaying the sale until the end of the loan term.
“Delay” is an operative word here. The reality is that borrowing against your bitcoin is a bit like selling it forward, but with some terms, like price, unspecified.
A bitcoin-backed loan creates a liability for you to pay back a dollar-denominated principal amount in the future. This means the amount of bitcoin you need to sell to cover this principal is variable relative to its price. If bitcoin’s price appreciates during the life of the loan, you’ll sell less of it than if the price declines or stays flat.
Regardless, you’re locking in a sale when you take a loan (unless, of course, you have some other way to pay it back).
The hope is that bitcoin’s value continues its relentless march higher, above and beyond the rate of fees and interest needed to service the loan. Longer loan terms and lower interest rates make this easier to pull off successfully.
By way of example, let’s say you have $100,000 of expenses in your first year of retirement. You don’t want to sell your bitcoin (listen to Trump!), so instead you seek an Aikido Finance option to borrow against it.
For easy math, we’ll assume a 2% origination fee, with 10% interest, and a 5 year term. We’ll also finance the origination fee by adding it to the principal amount. After all, we need $100k to cover our expenses.
In this simple example, we’ll take on annual interest of $10,200, or $850/mo as a new expense. Over the course of the 5 year period, we’ll pay a total of $51,000 in interest. However, as long as the price of bitcoin grows faster than the rate of interest, we should be in a better position than if we sold the bitcoin up front.
🔢 Covering the interest and maintaining the loan
Borrowing against your bitcoin in this way is designed to work if you can service the debt long enough for bitcoin’s price to rise. We all know the price is volatile, and we don’t want to be a forced seller of it at low prices.
There are two pieces that must be addressed: interest payments and BTC collateral.
Interest payments
Before taking on any debt, make sure you have a plan for the interest payments. There are a few different ways these can be covered depending on your particular situation:
Income from other sources: Being retired doesn’t mean you have no income. Perhaps you have a passion project or side gig which income attached that can be used to cover these payments. A savings portfolio that includes stocks or real estate may throw off dividends or cash flow. Social security payments or pensions from your career are other sources that may be available.
Sell a small portion every month: Since the proceeds of the loan are used to cover your expenses, you can instead sell a much smaller amount of bitcoin to pay the interest on that loan. The effect of this is to only sell ~10% of the amount you’d otherwise sell without the loan, spread over the course of the term. While not ideal, you’ll get the majority of the appreciation benefit of bitcoin, while not having to rely on other sources of income to pay interest.
Pay interest from the loan proceeds: Since you’ll know up front what the interest payments we’ll be, you can set aside a portion of the loan proceeds to cover the interest payments. This requires taking on a larger loan, because you need additional cash for those payments beyond what is needed to cover expenses. The upside is that you don’t have to worry about where the interest payments are coming from, and you don’t have to sell any bitcoin up front or through the life of the loan.
BTC collateral
Just as important as paying the interest is being able to maintain the margin requirements for the loan.
To start, you’ll be providing bitcoin as collateral. Similar to a mortgage, these loans are over-collateralized, meaning the value of the bitcoin collateral exceeds the principal of the loan, typically by a healthy margin. While a mortgage can have a loan-to-value (LTV) ratio of 80-90%, bitcoin-backed loans will be similar to stock margin loans, with an LTV of 40-50%.
Also unlike a mortgage, bitcoin can be marked to market every second of every day. While lower LTV ratios provide a large amount of cushion, bitcoin’s price volatility means large, sustained price drops can put you into a margin call situation.
Again, you don’t want to be a forced seller at a low price, so it’s imperative that you have a plan to maintain the collateral position of the loan during these times. It’s a good idea to go into the loan expecting this to happen and arming yourself with a plan to react.
The best way (pertaining to the goals described above) to maintain that collateral position to in turn maintain the loan is to have extra bitcoin earmarked for this purpose. A beautiful thing about bitcoin is that can be transferred 24/7/365, because it’s not reliant on the fiat financial system and tight time windows when banks are open for business. When you’re required to provide more collateral, you can simply send more bitcoin on very short order, regardless of whatever bank holiday that situation may arise on!
📋 A few best practices and final thoughts
With all of the above in mind, I want to share a few additional thoughts that I hope will be helpful as you consider borrowing against your bitcoin, either now or in the future.
Look for fiat financing first
Wall street and the banking sector are still coming up the learning curve on bitcoin. They don’t yet see bitcoin as the superior form of collateral that it is. That means there aren’t a lot of options for bitcoin-backed loans yet, and the terms available may make this strategy more challenging. But the fiat world is built on debt, and there are plenty of other options available for loans that will likely have better terms than a bitcoin-backed alternative.
Whether it’s better interest rates, or collateral requirements that don’t have the risk of margin call, I consider alternatives for fiat financing before I consider borrowing against my bitcoin.
After all, it’s the last asset I want to sell.
Be conservative
Give yourself plenty of cushion for maintaining your bitcoin-backed loan. Leveraging your entire bitcoin stack up front is a recipe for losing the whole thing.
Instead, consider borrowing against your bitcoin only after its value is large enough where you only need to leverage a small portion of your overall stack to meet your needs. If 10% is the most you’d want to provide as collateral, start only when 5% is adequate, with a plan in place to reinforce the collateral position with the additional 5% if needed.
Understand your counterparty risk
Borrowing against your bitcoin means giving up full control over it. There is no way to get around this fact.
The lender needs assurances that the loan principal will be repaid in the event of default or unaddressed margin requirements. No lender will allow you to have the loan proceeds and also keep full control of the bitcoin collateral.
That means you have to trust the lender to protect that bitcoin during the life of the loan and to send it back to you once it has been repaid. There have been many examples in the past where this has not been the case: BlockFi, Celsius, Voyager, Genesis, etc, etc. Whether from malicious intent or mismanagement-turned-bankruptcy, many people have been burned because they did not understand the counterparty risk they were exposed to.
Unchained’s commercial loans address this using collaborative custody with no rehypothecation. I won’t dive into the details here, but suffice it to say that the custody arrangement for your bitcoin collateral is of paramount importance.
The banks are (probably) coming
Historically speaking, providers of bitcoin-backed loans have sourced their funding from private investors and forward-thinking people who see opportunity that other traditional investors won’t touch.
This comes with high interest rates and other terms that are generally unfavorable to the borrower. It’s a supply and demand problem.
That will likely change in coming years. Wall Street is warming to bitcoin very rapidly, and if there’s one thing those folks are experts at, it’s financialization.
Banks, in particular, are in the fortunate and privileged position of having legal authority to print money. When the banking industry comes to play, they will bring massive amounts of capital for lending against bitcoin, which should drive down rates and make loan terms more competitive.
Final thought: As I’ve made clear in previous newsletter issues, I’m an advocate for leveraging the fiat financial system to get wealthier more quickly. Credit is essentially subsidized for those who have access to it and understand how to use it for their benefit. There are risks, of course, as with everything in life. As long as you manage it with eyes wide open, you can take advantage of the situation to help you along your FIRE journey.
I believe bitcoin will usher in a world less reliant on debt. Until then, we might as well embrace it.
That’s it for this week. Thanks for reading!
💡 Enjoyed this content? Share FIRE BTC with someone who’d love to learn about financial independence and bitcoin!
Until next week,
Trey ✌️
P.S. I traveled to NYC a couple of weeks ago for a private event hosted by Unchained at the famous PubKey bar, where Donald Trump became the first US president to send a bitcoin transaction. Before the event, I sat down with Marty Bent to recording an episode of TFTC. We discussed my time at Unchained, bitcoin crossing $100k, and of course, bitcoin + FIRE.
Banger.