Oddbean

Look man I’m not saying that you shouldn’t take out a loan against your bitcoin. I’m not even saying that’s a bad idea. All I’m saying is that I don’t think you understand what yield is. But you do you 🫡

In this case it's coming from people who prefer dollars over Bitcoin, or from newly created Bitcoin. I'll write the process: - get a loan (receive new fiat) - take new fiat and buy Bitcoin - Bitcoin goes up (this step is crucial for success) - Sell Bitcoin to cover loan liability - Profit This will not work forever, but it's undeniable that it has worked in the past and works now under the right conditions. The word 'Yield' is divisive though. Think about it like using a fiat cheat code to take Bitcoin from Bitcoin holders (who actually prefer dollars) by using the fiat system. If enough people preform this strategy, Bitcoins price increases through their leverage alone, and new sellers who want that fiat emerge. Booms and busts are ways to mine people's emotions.

But the amount of Bitcoin has not changed. So where is the yield? When I buy a bond, I’m getting more dollars back. That is the yield. Like a 5% interest savings account. Or like how Celsius was offering x% yield on crypto. The yield is the percentage you’re getting back. And the risk is that they lose all your money. In the case of a Bitcoin loan, the Bitcoin’s value goes up. But the amount of Bitcoin is the same. That’s why I said 1 Bitcoin = 1 Bitcoin. There is no yield with a Bitcoin loan. The growth in value in fiat terms has nothing to do with the loan. The risk is that the person holding your bitcoin while you pay back the loan can rug you. But that’s still not yield. The value of your bitcoin would be the same if you never took out the loan and never sold it. So it’s not yield. Unless my understanding of yield is different from yours 🤷‍♂️ The internet seems to have conflicting definitions of yield.

The 5% interest in a savings account is supposed to come from the people who are borrowing your money at a higher rate. You and me both know that's not how it really works, but that's still how most people see it. I know the total supply of Bitcoin is fixed, and that there is no "native yield" to Bitcoin. But if you lend your Bitcoin to someone at 5%, and they are able to repay, then you get a 5% yield. The fiat/Bitcoin yield is much more sustainable because your liability is dollars. When you get a loan, new dollars are created. So let's say you gain $10,000 in dollars as an asset, and owe back $11,000 as a liability in one year. By buying Bitcoin with the dollars, you get Bitcoin and you also increase the marginal price of Bitcoin. Combine that with Bitcoins fundamentals, and as long as the Bitcoin is with more than $11,000 in a year, you get to keep the difference in Bitcoin. That is your yield. The yield comes from the people who sold you the Bitcoin at the lower price. That is the game currently being played.

I understand all that. I’m just disagreeing on the definition of yield. But there doesn’t seem to be a consistent definition of yield so you could be right. Yield seems to mean different things in different contexts. In the “crypto” industry, yield is letting the exchange/bank hold your coins in return for x% back. The yield that they pay you has to come from somewhere. So they do risky shit until they get rekt. That is very different from getting a loan against your Bitcoin at unchained. In this context, saylor wants to earn yield on his Bitcoin from chase bank. He talks about it on the podcast I posted. That is the future he envisions. But he doesn’t understand, or pretends to not understand, that this yield is not risk free. That the money has to come from somewhere and that there is no lender of last resort in bitcoin. There is no risk free yield. They can’t just print more Bitcoin.

Fiat is an unfair, rigged system which benefits the elites who can print money. People like Saylor are going to use that system to get as big of a Bitcoin position as possible. If anything, if I was Saylor or Blackrock, I'd say whatever stupid shit I needed to in order to shake people out and get cheaper Bitcoin. Everyone likes cheap Bitcoin and sellers provide the yield.

The risk reward ratio of such leverage increases over time. In the long run, guaranteed rekt… The main problem with leverage is improper planning, commonly the false assumption that Bitcoin price won’t plummet or that other activities will bring steady income to service leverage interest. When it comes to debt, most people should probably have some in order to maximize bitcoin returns. But not too much! Taking on debt denominated in dollars was typically only wise for things like houses and sometimes education, but in the Bitcoin world, there is an non-zero interest rate at or below which even buying groceries with debt makes sense. But securing a loan with bitcoin gives terrible rates. Thought process: should one buy bitcoin or a house? Bitcoin. Ok, so you bought a house. Should you buy Bitcoin or a car? Bitcoin. Ok you bought a car. Should you DCA in to bitcoin now, or sell all your possessions and yolo in. You should yolo. Ok, you’re on the DCA path. Should you borrow from home equity to buy Bitcoin or should you just keep DCA. So you just keep DCA. Then someone says: shouldn’t you diversify your assets? No. So you diversified your assets, but kept half your stack and kept stacking, but at a lower rate. All of these “safe” choices turn out to be very very costly. But it’s true this path minimizes risk. But this is the path most of us choose and I’m guilty of it. If I would have borrowed $10,000 from the bank of mom and dad in 2010, I’d be a billionaire. But I’m risk averse and stupid.

But the amount of bitcoin has changed. To calculate yield, you need to look at how many bitcoin do you have at the unwind of the leverage compared to the amount of bitcoin you hold had you not levered (which in the case of a car loan is the lesser number). You must take as a given a car will be bought and you will either borrow dollars or sell bitcoin to get it. You can’t compare to the scenario of doing nothing. What may also seem confusing is this type of leverage multiplies yield by less than 1 (minimizing lost bitcoin) which seems strange to financial types who can only see leverage as magnifying yield.

Think of it this way, if I had borrowed $40000 to buy my wife’s minivan, I would have saved 7 bitcoin. I effectively bought those 7 Bitcoin over time with each loan payment. So those 7 bitcoin were dca’d into over say 5 years. My return over 5 years is undoubtedly less than had I just held those 7 Bitcoin, because my cost basis moved up, but remember we are comparing against having sold the bitcoin, not merely hodling. After paying off the loan, you have 7 bitcoin and a vehicle.