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Another Leveraged Crypto Borrowing Binge is Underway, Guaranteed to Blow Up

Lenders have made it easy to take out loans backed by cryptocurrency holdings. Regulators cracking down.
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Coinbase Lending Platform

Leveraged Borrowing Binge 

Please consider Bitcoin to Bucks: Crypto Fans Borrow to Buy Homes, Cars—and More Crypto.

Crypto enthusiasts are tapping their holdings to buy homes, cars and, often, more crypto. They are getting these loans from upstart nonbank lenders and automated, blockchain-based platforms.

The business is growing rapidly. One group of crypto lenders has $25 billion in loans outstanding to individual and institutional clients, up from $1.4 billion a year ago, according to the crypto research firm Messari. 

Celsius Network depositors earn a 6.2% interest rate on up to one bitcoin, worth over $46,000. Borrowers pay between 0% and 8.95% on bitcoin-backed loans, depending on the loan-to-value ratio.

Crypto lending has drawn regulators’ attention.The Securities and Exchange Commission is investigating Coinbase Global Inc.’s proposed crypto-lending plan and has indicated that it would sue the company if it moves forward with the program. New Jersey’s securities regulator in July accused the crypto lender BlockFi of selling an unregistered security, a dispute that could prevent the company from opening new “interest accounts.” BlockFi said it is in discussions with regulators and believes the accounts are legal.

Amusing Example

The WSJ gave this amusing example of the type of chain transactions going on. 

  1. A crypto speculator pledged a chunk of his ether holdings in exchange for a loan at a 0.5% rate denominated in Dai, a stablecoin whose value is pegged to the U.S. dollar.
  2. He swapped the Dai into a stablecoin called USD Coin. 
  3. He then used Coinbase to change the USD Coin into dollars. 
  4. From Coinbase, he sent the money to his bank account.
  5. He used the money to buy a house.
  6. He said he pledged ether worth 2½ times the amount of the loan to lower the odds of a margin call.

Well, at least he has a house, sort of. But what happens if there is a margin call and he needs to sell the house? The terms of the loan weren't specified.

Regarding margin calls, “What if I was on vacation and had no idea?” the speculator asked. “It’s not for the faint of heart.”

Others are borrowing for landscape projects and cars. 

The riskiest maneuver is to borrow to buy more cryptos. The article notes one trader who wakes up in the middle of the night to see if he has a margin call. 

Others simply chase interest. They buy cryptos and lend them out for 8% or whatever interest. But there is no FDIC guarantee on these transactions.

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If those crypotos get lent to someone who blows up, you have your 8%, assuming it was paid, but you lost your Bitcoin in the process.

This happened in the last big crypto plunge when Bitcoin fell from $64,000 to $30,000.

Undaunted, speculators are back at it already.

Sponsored by the Fed

It's important to understand the Fed directly sponsored this speculation with deeply negative real interest rates. Congress helped by paying people more to stay home than they made working. 

For discussion of negative rates, please see Housing Adjusted Real Interest Rates Sink to a Record Low -8.5 Percent

Also note the Corporate Junk Bond Bubble In Two Pictures.

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