What if Nexo had more than $100m USD worth of YOUR assets? More than their centralized bank-backed insurance fund protects? What if Nexo began speculatively investing YOUR funds into third-party protocols, putting the capital at risk — or even losing substantial amounts of it?
What if Nexo, Monaco (MCO) or TenX bailed with all your funds — in massive exit scams the likes of which we have indeed seen before, at Mt. Gox or QuadrigaCX?
What are the alternatives for collateralized loans — where can we hedge our crypto assets, using Bitcoin or Ether or other underlyings to draw tax-friendly income?
Read on…
Centralized Off-Chain Crypto Interest on Holdings — and Collateralized Loans Against Crypto — Seems Like a Great Idea
While Nexo and Nexo clones offer some great incentives to help you feel safe & secure handing over your hard-earned crypto, like a $100 million insurance fund or tax-friendly income while not spending your assets — there are huge pitfalls to trusting The Man with your units of value… with YOUR money.
Sure, someone may be in the position where they hold 1 BTC and want to earn a % of that 1 BTC back from an organization while doing absolutely nothing. Seems risk-free, right? ‘Compound your crypto’ is a popular sentiment on the Internet of late — I even use that phrase in my twitter bio.
What does it mean, in actual effect?
Well, if I have 1 BTC now and that BTC earns me 8% APR — each and every year — that 8% will earn another 8% on the 8% in year 2.
If we’re also long BTC, or think it’ll grow at, say, 5% average per year in value, then our resulting investment would look like this:
After 10 years your BTC has nearly doubled, and the value of that BTC is up 112x….
That seems to be fantastic, right? And a 5% growth on BTC per year is rather.. well, conservative, right?
Other Side of That Coin
Say we’re even more long on a bullish BTC, and think it’ll rise in value by — say — 30% per year. Now, we can look at Nexo or other centralized bank-backed solutions to lend US Dollar against our asset. I’m risk averse to clicking on their site, but I imagine their rates are maybe 10–14% APR. So, we lend the max. amount against our BTC at around $4500 USD, and pay 14% on the loan — while our BTC appreciates 30%.
Here’s what that math looks like:
All else remaining equal, shortly after 6 years we have ALL of our bitcoin back in appreciated value vs what we owe on our loan.
Let’s go even more bullish BTC — think The Halvening will grow BTC to $12k, then it’s a clear road to $20k, then moon? So do I!
If BTC grows 230% in a calendar year, we effectively have a free half BTC in loaned amount in less than a year. That’s fantastic! Free money!
Now, the Catch
I wonder if Nexo has overgrown their little insurance scheme? I wonder if too many people have trusted something too good to be true — in the hands of a select few, a legal entity, and human fallacies?
Even more sinister, let’s say Nexo was sitting on millions of dollars in Ether. Let’s say they thought — nay, they bet on the idea — that Ether would never ever possibly depreciate past $300. Long Live Ether, right? Now, they use a third party protocol to lend against their Ether bankroll — to the tune of millions $ USD — to boost their coffers and all their marketing campaigns to draw more people into their massive ‘insured’ ponzi.
Then, as we witnessed, Eth did go down. Way. Past. $300.
Can you think of anything more sinister… than risking people’s funds they trust your insurance to cover, then losing it?
- Trust the banks to mess with you like this.
- Trust custodial solutions to mess with your hard-earned cash.
- Monaco’s Visa Card, TenX, Populous, and the Others
Nexo has another product in the pipes: a crypto-loans backed credit/debit card. When you put your crypto onto a debit/credit card, you’re actually just giving it to banks to hold onto — and with that, you’re giving them all of your personally identifiable information, as well as the right to track you and sell your data to the highest bidder (and all the other bidders with half a dollar).
What this means is that you’re taking the ultimate grassroots revolution against banks and the richest 1% and giving it right back to them. This goes against everything Satoshi and all the other crypto revolutionaries had wanted with their digital cash. Do Your Own Research, and decide what’s right.
Moreover, existing crypto card solutions like cryptopay.me and xapo all lost their licenses for dealing with North America and loads of other places — because banks, by and large, don’t trust crypto.
If you need to spend your crypto look to solutions like localbitcoins.com — where you can even sell your BTC at around 1% on the dollar value to meet in person and get cold, hard cash.
The Solution
Never, ever trust custodial solutions! There’s such a thing as counter-party risk that’s well documented, and this is why decentralized exchanges and decentralized finance are winning with a clear advantage — employing trustless solutions where people are interacting with a tech protocol rather than an organization, person, people, or — worse yet — a bank.
Solutions are abound: check my article comparing the top 6–8 decentralized finance protocols.
Of these, a few come to mind for compounding your crypto: like compound.finance, where you can earn interest on your cryptos while holding them in your own damned wallet, secured by your own damned keys.
This completely removes the counter-party risk of earning on your crypto. Almost all the other solutions in the above article like nuo.network or fulcrum.trade allow you to earn, too, sometimes at higher rates — and aggregators exist, too, like staked.us’s Robo Advisor for Yield which allows you to passively rebalance your lent portfolio.
Compound also allows you to borrow against your crypto assets — all on-chain, all non-custodial. You own your own keys. You can receive a number of stablecoins for your Ether or other tokens, or even borrow against non-stable assets — the choice is yours to long or short whatever you like.
They currently don’t support borrowing against BTC or the BTC-backed Wrapped BTC (WBTC), but have no fear! Fulcrum.trade has a sister-site powered by the same protocol https://torque.loans/ where — at present — you can get $4800 in stablecoins for your 1 WBTC.
The Verdict
Never, ever trust The Man with your money. That’s the point of Blockchain. Banks, governments will collapse and fail, the ATMs will stop giving you money and gas will stop being delivered to your favorite gas stations — food will stop being delivered to your supermarkets — but crypto will not fail because the protocols are run without the interference or governance of man (or woman, or other).
Tired of The Man earning from your browsing habits, personally identifiable information and by selling your data? Try the Brave browser, which not only protects all of your data and privacy, but also axes all those damaging ads around the web — delivering you a faster, safer browsing experience!
A Plug (or Two)
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Originally published at https://jare.cloud on January 20, 2020.