This won’t be your usual crypto article. Of course, what is the usual crypto article? After a little background, we’re going to launch into a realistic scenario based on factual info with fictional characters. So let’s have a little fun during this awful pandemic. Join me, OK?
BACKGROUND
Crypto lending is becoming a new trend all over the world because the rates are just amazing.
In an American bank, you deposit your money and the FDIC protects you up to 250,000 dollars. While that’s a great deal, you’ll make close to zero on your money.
The bank, however, gets to loan your money that you deposited and make at least 3-5% or more on the borrowed funds. That’s great for the bank but not for you. Even without FDIC insurance, it would be unusual for an American bank to fold so your money is pretty darn safe.
And with the notorious COVID 19 pandemic, the US government is more than willing to print trillions of dollars to buoy up virtually any business. But the dirty little secret is that none of the American bureaucrats admit that the US is printing gobs of money. Have you actually heard any comments about this? I haven’t. But that’s another story and we will explore that investment realm as well.
So first, let’s delve into the world of crypto lending. There’s a big story to tell. In order to do this, I am going to create a few characters and we are going to follow them on their journey into the crypto lending arena during the COVID 19 pandemic.
While the characters are fictional, the journey will be based upon fact so that you can evaluate if you wish to put your crypto into an interest bearing account or borrow money from the very same platform.
Ok, so who are the players? Let me introduce you to my friends!
THE CHARACTERS
ARNOLD SATOSHI- He wants to make money by depositing his crypto into an interest bearing account. He’s an older guy but is excited about making stellar returns to help fund his retirement. Right now he is quarantined and fighting with his relatives. BTW, where is the real Nakamoto Satoshi, the inventor of bitcoin, which is hundreds of thousands of lines of computer code? If you see him let me know!
Essentially, each bitcoin (BTC) is divisible to the 8th decimal place, therefore each BTC can be divided into 100,000,000 units. Each unit of bitcoin called a Satoshi equals 0.00000001 bitcoin. A Satoshi is the smallest unit of Bitcoin. Virtually anyone can buy a Satoshi.
COIN PIZZA- The crypto firm where Arnold deposits his money. Remember, it’s fictional! Ahhh, who can forget that 800 million dollar pizza...that poor soul who spent bitcoins for pizza back in 2010. Talk about FOMO (fear of missing out), that guy really missed out.
At any rate, this firm, located in Timbuktu, began in 2016 to lend crypto. In fact, the richest man in history, according Money Magazine was Mansa Musa, the king of Timbuktu, who lived between 1280 and 1337. Timbuktu was the biggest producer of gold at a time when gold was in gigantic demand. Relatively speaking, his net worth was thought to be well over 400 billion. Take that, Jeff Bezos!
King Musa really liked his gold and unlike Jeff Bezos,—he had a gold cup, a gold gold staff, gold crown and once loaded a string of camels with hundreds of pounds of gold. Maybe Jeff Bezos has ridden on a caravan of camels full of gold, but so far, it hasn’t happened to my knowledge which is shrinking every day. Ok, I’m a baby boomer! The secret’s out.
Coin Pizza knew inflation had hit hard in another African country, Zimbabwe. In that country, there were quadrillionaires. Yes, that’s true. Inflation had gone up 79 billion % by 2008 and a 4 trillion dollar bill could buy a loaf of bread. Taxi fares were vastly different in the morning and afternoon.
Perhaps Coin Pizza could be Africa’s oasis in the Sahara by offering folks a Satoshi of bitcoin that could never be manipulated by cruel, centralized governments!
JOHN B. CRYPT- The millennial man who borrows money from Coin Pizza. He’s trying to make a killing on his crypto. This astute 25 year old studied crypto since the age of 14. He hates paperwork and prefers texting to lengthy wasteful phone calls.
THE REST OF THE STORY
Arnold Satoshi wants to make some money. He needs to deposit some crypto with Coin Pizza and make interest on his crypto. He’s one of the few older folks that realizes the ingenuity behind crypto. He tells all his older relatives but they all tell him that crypto’s for drug lords and the North Koreans. BTW will Kim’s sister be a sweetheart and start a democracy? Don’t count on it. So Arnold continues to fight with his relatives during his quarantine.
At any rate, the stock market dropped 20% (35% at the peak drawdown), and Mr. Satoshi is at high risk for acquiring COVID19 because he is over 65 and has the top 3 risk factors, obesity, hypertension and diabetes.
He has been at home since March and is reluctant to go back to work. Plus he is worried that 75% of COVID 19 patients are asymptomatic carriers. Bad news for him if he wants to go back to work.
Coin Pizza provides him with a breath of fresh air with accounts for crypto that pay high interest. Finally!
Simultaneously, John B. Crypt, the borrower, creates an account with Coin Pizza and wants to take out a loan. Coin Pizza gives him a 1 year loan in US dollars for 5%.
Arnold Satoshi is all excited and invests in the USDC through Coin Pizza, a stablecoin that is pegged to the US dollar. He figures that these coins are pretty safe and USDC has maintained a value of around 1 dollar for its entire existence.
In fact, he remembers reading that for every USDC purchased a dollar is put in the bank by Circle, it’s founder, in order to maintain the stability of this coin.
He’s a little worried about investing in Tether (USDT), another stablecoin, because he read about previous fears raised that Tether Limited doesn’t actually hold enough U.S. dollars to support all the Tether digital coins in circulation. And Tether is governed by the laws of the British Virgin Islands. So maybe this governing body doesn’t regulate the coin well enough and perhaps Tether will not fulfill its obligations. So far it has, but old Arnold is nervous.
But he finally decides to pull the trigger and invests $10,000 into the USDC coin and Coin Pizza gives him a whopping 8.5% interest.
Wow, Arnold Satoshi is really enthused. He knows he could never get that sort of return in a money market. In fact, Arnold, a baby boomer, hasn’t seen those rates since the 1980s in the United States. But he laments that those days are long gone. He figures his retirement income will skyrocket with this investment. He is already afraid of stocks and can’t get back to work due to COVID 19.
Ok, so what happens to Mr. Satoshi’s 10,000 dollars? He is now making 8.5% and his 10,000 bucks is lent out by Coin Pizza to Mr. Crypt, the astute millennial borrower. BTW, he decided to go back to work because with all the asymptomatic carriers, the death rate of COVID 19 is actually about the same as the flu. And at the young age of 25, he calculates that the his risk of dying from this ailment is less that .1%.
He still wears a mask so that he doesn’t give the disease to another person in case he is an asymptomatic carrier. The antibody tests are just not ready for prime time yet. His doc tells him that antibodies may be produced after exposure but they may not afford him any immunity. He wears the mask to help others and puts testing on hold.
So, back to crypto, where John B. Crypt borrows Mr. Satoshi’s 10,000 bucks. But what does he need to do to get that loan?
He knows that he has to put up collateral to insure that he can pay back the loan. So John B. Crypt puts up $14,000 and gives that money to Coin Pizza. The money is kept safely by the crypto firm just in case Mr. Crypt defaults on his loan.
Coin Pizza earns a little interest for themselves on the collateral in addition to collecting interest on the loan. Coin Pizza is clearly in the drivers seat. It is paying out 8.5% interest on USDC to Mr. Satoshi but it holds $14,000 in collateral from Mr. Crypt which is making interest and Coin Pizza is collecting 5% on the loan given to Mr. Crypt! And worse, comes to worse, Coin Pizza can always take Mr. Satoshi’s money if the loan isn’t paid back. Looks like Coin Pizza is sitting pretty, right?
So Mr. Crypt, a bold millennial, sees that his LTV or loan to value ratio on that loan is 70%. So he put up $14,000 of his own money as collateral to get the $10,000 loan. $10,000 divided by $14,000 is around 70% which is a reasonable LTV. He realizes that he can borrow a lot of money with absolutely no paperwork. What a deal!
So now Mr. Crypt has put up $14,000 of collateral and gets the $10,000 loan. He’s overjoyed that he doesn’t need to go through all the paperwork for a bank loan. It was simple and he is itching to invest the money into an interesting crypto coin which should make him a killing.
What does Mr. Crypt do with the money? Does he invest in the bitcoin? He hears that the bitcoin supply is going to be reduced since the mining or production is going to halve in May 2020, so he is considering buying some coins.
He also surmises that there are only 21 million bitcoins. This is a decentralized supply that just cannot be manipulated by evil central governments.
Probably 5 million bitcoins are already lost because people forgot their passwords or lost their Google Authenticator for 2 factor authorization security when they bought a new phone.
He relishes the fact that mining or production of bitcoins will soon halve. And, on top of that, the demand is skyrocketing because greedy brokerage firms will soon allow bitcoin trading.
In fact, he read that TradeStation, a popular, US firm, is already allowing future’s traders to buy bitcoin on their exchange. And he knows that Wall Street is very, very greedy just like “The Sharks” on Shark Tank. He reads that Fidelity will soon follow and they already manage oodles of money. Oodles is not a millennial term and clearly reveals the age of this writer.
So, what will happen to John B Crypt’s loan? Will he default or succeed in making loads of money? What new coin is he talking about? Is it the bitcoin or some other altcoin (smaller coin but not bitcoin) that he studied?
Will our baby boomer, Arnold Satoshi, actually make 8.5% on USDC and fund his retirement? Or will he lose it all and collect $ 1400 a month on Social Security? Will he be able to convince his old relatives that not all bitcoin is managed by drug lords and ruthless dictators? Will his quarantined household erupt?
Part 2 happens tomorrow, won’t you join me?