There’s a Bitcoin enthusiast called Michael Saylor that seems to do a hundred interviews a day lately. “Enthusiast” is too weak a word for him. He’s our champion. He has laser beam eyes of pure Bitcoin energy. From listening to him I have understood that not only has he put all his spare cash into Bitcoin but he’s also put all his companies spare cash, then taken a loan and converted it to Bitcoin, then he’s used his Bitcoin as collateral for more loans, that he’s also put into BitCoin. In short, he’s all in. I don’t think you can get any more in. The way he speaks about cash is as if it’s a poisonous liability for him and he speaks about loans in a way I didn’t understand at first. He treats them as financial instruments. Until now, I didn’t understand that loans aren’t purely a thing to be avoided unless desperate. They can be used to make money. It seems “the rich” frequently use loans to do stuff without selling the things they want to hold onto to. I often hear the saying “money makes money” and have come to realise that loans taken on existing assets are one way that this is true. It’s probably unbelievable to you that I didn’t know this given that I’m 41. Trust me, there are many obvious things I don’t know. You know nothing,
Jon Snow Tom Fotherby.
The Ethereum ecosystem has many projects that have captured my imagination. Decentralised Finance is super interesting to me. There’s a bunch of projects all held together by smart contracts, rather than human gatekeepers. You can build money lego without needing permission from a bank. It’s a trustless system because you don’t need to trust someones word – you can check the code of the smart contract and it’ll do what it is programmed to do. Code executes – there’s no need to have to trust whether the code will do what it says. It will. That is how code works. It’s why I love it. It’s why I’m a coder by trade. They are calling this DeFi movement “web3“. web2 was when the web became interactive enough that we started to socialise on it. web3 is when the web has it’s own native money so we can do business on the web, but bankless.
I decided to try my own “financial engineering” experiment, on a tiny scale. I wanted to see if I could take a loan out, using some Bitcoin as collateral. I had collected a little Bitcoin over the last few years by paying a little pocket money into CoinBase every few months. My thinking was that my Bitcoin is sitting doing nothing. Given that the market seemed to be going “up and to the right”, I could put my Bitcoin to work. I used a platform called Aave. I was attracted to it because it seemed to have a idealistic CypherPunk mentality as opposed to similar platforms that are owned by Silicon Valley Bros funded by venture capitalists. Aave, to me, seem to treat the tech as their king. They seems the opposite of a Bank. It’s an open source and non-custodial liquidity protocol. Open Source? Non-custodial? Where do I sign? a.k.a. I liked their approach.
The important thing to make clear is that the loan can’t affect “real life”. The loan is purely related to the Crypto world and cannot impact my actual bank account or credit rating. Aave don’t know my name or phone number or home address. Failing to pay the loan and therefore getting liquidated is not a negative thing in their eyes. In fact, the Aave community make some money when loan liquidations happens so if anything, they are happy when degenerate gamblers get rekt. I wouldn’t do this experiment if it could affect my family or if it meant the difference between whether we could take the kids camping this year or not. It’s imaginary internet money only.
So I leant my Bitcoin into Aave, and borrowed something pegged to USD (called DAI) against it. Then I swapped the DAI for Ether. Then I waited for the Ether value to go up, hoping that it would go up faster than the loan interest went up. I called the project, “Project LoanShark” to explicitly acknowledge that the loan interest was excessive. It was 30% APR when I started the project! 30% interest on a loan is pretty bad, but Crypto has gone up 200% on average per year so it would hopefully be profitable regardless. I was planning the project to go for 2 years or until Ethereum v2 launches.
After just 40 days, I shut the thing down.
It feels like the loan won’t weigh on you. It feels like you put so much thought into the project and did the calculations so carefully that it’s not a loan, it’s a “financial engineering project”. You tell yourself this is magic internet money, not real money so it doesn’t matter if you lose it. But in my experience, after a few days it just felt like I had a hot coal burning a hole in my brain. It started to feel like I was holding my breath all the time. I started sleeping badly. It felt like there was a war going on for my attention, and the things that I actually value, like health and family were not winning. And this was even though the market was doing fine. I was miserable even though the CryptoSphere was pretty healthy.
So I settled up. I got out. And now I’m feeling fine. Actually, “fine” doesn’t do my feelings justice. I feel a BIG sense of relief. I feel like I’m not holding my breath all the time. I know I will feel I missed out when the Crypto upturn happens but I can’t win either way – I have to choose between either Stress on one side or the Fear-of-Missing-Out on the other side. I can live a nice life with FOMO, but I can’t live a nice life with Stress, so it’s a easy decision. Easy not easy.
From using Aave, this is what I learnt:
- It doesn’t seem like it will take any time up at all. IT TAKES ALL THE TIME. It consumes you. Dreaming, Nightmaring, Checking charts, Watching 50 hours of YouTube a Day, etc. It’s like a 2nd Job. A job that pays minimum wage (or potentially negative wage).
- Do not underestimate the fees. Eth fees are crazy and Aave fees are even more massive, in particular for taking loans AND even worse for paying back loans. If the project is a success, it means that ETH has gone up so the cost of the fees (in USD value) are also up. Since the loan is in DAI, the dollar value of fees matters a lot. The fees make it hard to make profits. My Project cost me $1600 in fees. Like I said, NUTs!
- It works best if whatever you buy with the loan you put back into Aave as collateral. This way you can easily pay back the loan in minimal transactions and you can easily see your position within the Aave Dashboard and you have a healthier loan-to-value ratio. It’s good to see from the Aave dashboard whether you are at a profit or loss. Aave doesn’t offer a big selection of tokens that you can deposit as collateral. I was mostly interested in increasing my ETH position so Aave was a good fit.
- In my opinion, it makes sense to have an aim of pulling out the original collateral when possible so that you are playing purely with profits.
- It’s cheaper to be simpler – It’s tempting to get a load of different ALTs and play around a bit. Don’t! Borrow just ETH, not BTC & ETH. The Aave fees are fixed, i.e. not relative to amounts, so playing with two tokens doubles the fees.
- Replaying a ETH loan is cheaper than a WBTC loan. e.g. repaying my ETH cost only $140 but repaying BTC cost $220.
- When big things are happening in the market, you need to up the gas price so the transaction happens quickly. I wanted to exit my position but the gas price went up after I submitted and I had to wait a nail-biting 90 minutes for the loan to be paid, all the time watching my profits drain away. It was horrendous.
- Due to fees, Aave is better for long term projects.
- Although the DAI loan APR was 30% when I started the Project, it was much lower on average, e.g. 20%. The good thing about the loan interest is that it goes down when there’s less demand from other people. I found this meant that when I was losing money, the loan APR was small, and it was big when I was making money. This makes it much more comforting.
- I originally envisaged topping up my collateral each month. Wrong! Don’t expect to do that. Depositing into Aave is not a normal ETH transfer, it’s got much higher fees. Since I only have a small amount to invest each month (e.g. <£100), the fees mean I have to wait until I have a more significant sum. It’s disappointing.
- In the same vain, don’t expect to pay a little interest off each month. It seemed to be about $120 in fees to pay off any amount of the loan so you have to plan to do it all at once at the end. The fees make it so it doesn’t make sense to slowly pay it off bit by bit.
- I originally envisaged being able to pay directly into Aave using their transak fiat onramp. Incorrect. The Aave fiat onramp puts the Crypto into your wallet and you have to pay the fees to get it into Aave. My mistake. Shame.
- Paying off the loan is even more expensive in fees that borrowing in the first place. It really eats into profits or makes it hard to break even in the first place. You won’t realise this until the end of the project so it bites you at the last mile.
I’m glad I did the project. I learnt a lot. But mostly I learnt that I’m allergic to loans. I have a mortgage – that’s 1 loan too many already. From now on, I’ll stick to Dollar-Cost-Averaging in a tiny bit each month and HODLing.
Mid life crisis averted? or is it the biggest opportunity of my life wasted? Time will tell.
There’s a token called hex, which I like because it provides minimal stress. You buy some and choose how long to lock it up. The longer you lock it for, the better interest rate you get. You can’t touch it until the end date. I locked some up for years and it’s a Godsend for someone who apparently doesn’t handle stress very well because there’s no point monitoring it or the markets. It’s not a time vampire. It’s locked, there’s nothing you can do even if you wanted to.
The other great thing about Hex is that, by my reckoning, it has the best utility of all coins. A good chunk of the profits will go towards what is called “The Origin Address”, which is a fund that could work on life extension projects. Richard Heart, the creator of HEX, supports the Methuselah Foundation, a non-profit organization with a declared mission to ‘make 90 the new 50 by 2030’ by supporting tissue engineering and regenerative medicine therapies. That’s my take on HEX anyway, Hex makes no promises and puts no expectations on the work of others.
Richard is one of the most interesting characters in the Cryptosphere. You see the wonky candles in the livestream screenshot above? You think it’s a mistake they aren’t straight? That’s how good at marketing he is.