what is happening

Cryptocurrency owners are borrowing against their holdings to buy homes, cars, and (of course) more tokens. Startup lenders are making it easy to take out loans backed by cryptocurrency, others are paying high interest on holdings.

Like banks, these lenders take deposits. Unlike banks, their deposits are in crypto and these deposits earn higher-than-average interest rates (north of 20% on some) are used to fund loans to borrowers who pledge crypto as collateral. Borrowers can get dollars or other traditional currencies, or stablecoins pegged to them, depending on the lender they are working with. Regulators are watching, we hope; however, there is so much money at stake that adoption seems almost certain.

The risks are high. “Yield farming is not much different than buying high-dividend paying stocks or high-yield unsecured debt or bonds,” Mark Cuban told The Wall Street Journal. “There is a reason they have to pay more than other companies. They are at greater risk.”  Antoni Trenchev, co-founder at the crypto lender Nexo Capital, said, “The idea is to shift some of your digital assets into real-world profits so you can’t lose them.”

Billions of USD is at stake.

our take

Turning digital assets into real assets like a home or car is a great use of profits. Decentralized digital assets like NFT’s have very little use value as a whole; however, people continue to buy them and see incredible real world financial gains from specific ones. Crypto markets continue to be over-leveraged and could see significant declines with or before the equity markets if margin calls arise.

If the crypto market collapses and you borrow in crypto, as long as you can just replace the loan in crypto and not USD, it’s a great hedge. For example, if you buy a $1 million home by borrowing against your million dollar bitcoin position, but only have to pay the loan back in bitcoin, you’re good.

In fact, what a good bet for Michael Burry. Borrow bitcoin to buy real assets like gold and replace the bitcoin when it collapses. Sounds like the next big short. Be careful is the point. Each bitcoin could still be a $1 million in 5 years or the total market for crypto could be zero.

Stay away from this unless you’re able to take the loss.