Borrow Against Bitcoin, Don’t Sell: Unlock Value

Crypto Holders Miss Out on Millions by Letting Assets Sit Idle

Many cryptocurrency investors are sitting on valuable Bitcoin and other digital assets that are earning nothing. While holding for the long term is a common strategy, this approach carries a significant opportunity cost. This means investors might be missing out on potential earnings or facing unnecessary tax burdens when they need cash.

For instance, holding $50,000 worth of Bitcoin that earns zero for a year could mean forgoing around $2,000 in potential interest, based on current high-yield savings account rates of 3% to 4%. This lost earning potential is just the first of two major issues many crypto holders face.

Selling Crypto for Cash Triggers Costly Mistakes

The typical reaction when needing cash is to sell a portion of crypto holdings. This seems like the obvious solution, but it often comes with hidden costs.

Imagine buying Bitcoin at $30,000 and needing $10,000 cash, so you sell some. If Bitcoin then jumps to $60,000, you’ve not only missed out on that significant price increase but also likely incurred taxes on your sale.

Selling crypto can trigger a taxable event. If you’ve held the asset for over a year, the profit is taxed at long-term capital gains rates, which can be 15% or 20% depending on your income. This means you lose potential future gains and pay taxes on profits already made, a mistake many experienced in late 2023.

Borrowing Against Crypto: The Real Estate Investor’s Secret

Wealthy individuals often avoid selling valuable assets like real estate to access cash. Instead, they use tools like a home equity line of credit (HELOC) or a cash-out refinance.

These methods allow them to borrow money against their property’s value without selling it. The property continues to work for them, maintaining its potential for appreciation.

This same principle now applies to digital assets like Bitcoin and Ethereum. Investors can use their crypto as collateral to take out a loan, providing liquidity without needing to sell. This strategy allows the asset to remain in their possession and potentially benefit from future price increases.

How Borrowing Works: A Practical Example

Let’s consider holding $50,000 in Bitcoin and needing $10,000 cash. Option one is selling a portion, triggering taxes and missing future upside.

Option two involves using a platform like Nexo. You deposit your Bitcoin as collateral and borrow $10,000.

This creates a loan-to-value (LTV) ratio of 20% ($10,000 loan on $50,000 collateral). A low LTV like this provides a significant safety buffer. While borrowing might have an interest rate, such as 12.9% APR (around $1,290 annually on a $10,000 loan), this cost can be far less than the potential gains missed by selling, especially if Bitcoin rallies significantly.

Earning Yield on Idle Crypto

For those not ready to borrow or who want their crypto to work harder, platforms also offer yield-generating products. These include flexible savings accounts that pay daily interest with no lock-up period, allowing immediate withdrawal. Alternatively, fixed-term savings lock your crypto for a set period, often up to 12 months, in exchange for higher interest rates.

The choice between flexible and fixed terms depends on your need for immediate access versus your conviction in holding for a longer duration. It is crucial to understand what you give up to earn this yield before committing your assets.

Understanding the Risks: Custody and Liquidation

There are two primary risks to consider when using these services. The most significant is custodial risk.

When you deposit crypto onto a platform, you transfer control of your private keys to a third party. This means trusting that the platform is secure, solvent, and won’t face regulatory issues or hacks, as seen with past collapses of platforms like Celsius and BlockFi.

While platforms like Nexo emphasize robust security measures, regulated custody, and fully collateralized loans, the fundamental risk remains: your crypto is not in your direct control. It is advised to use these tools intentionally, moving only the amount needed for a specific purpose rather than depositing your entire crypto holdings.

Loan-to-Value and Liquidation Explained

The second risk involves loan-to-value (LTV) mechanics. If the value of your Bitcoin collateral drops significantly, your LTV ratio increases. For example, if your $50,000 Bitcoin collateral falls to $33,000 while you still owe $10,000, your LTV rises to about 30%.

Platforms monitor this closely. If the LTV reaches a certain threshold (e.g., 70-80%), you’ll be notified to add more collateral or repay part of the loan.

Failure to do so can result in the platform automatically selling some of your collateral to maintain the required ratio. Borrowing conservatively with a low LTV greatly reduces the risk of liquidation.

Strategic Use of Crypto Tools

The core principle remains that Bitcoin should ideally be held in self-custody with private keys securely controlled by the owner. However, for those with idle crypto, earning yield or accessing liquidity through borrowing offers valuable options. These tools should be viewed as specific solutions, not replacements for self-custody.

Using these services makes sense when the math favors borrowing over selling, especially if the cost of borrowing is less than the potential gains missed by selling. It also applies when comfortable allocating a portion of assets to a regulated platform for yield over a defined period. Informed decisions, understanding the risks, and moving only necessary amounts are key to safely utilizing these financial tools.

(Note: Nexo offers a welcome promotion for new US clients depositing $5,000 within seven days, unlocking 30 days of premier tier benefits. New York residents are excluded. Information on specific rates and offers is subject to change.)

Source: Why I Never Sell My Bitcoin (I Do This Instead) (YouTube)