How to Borrow At 0% and Invest Like the Superrich
|By Chris Coney|
Let us start with the meat of this idea.
What is the advantage of borrowing money at 0%? And what would you use that money for?
Capitalism reveals the key resource right in the name: capital.
Using my personal definition, everyone starts out with what I call working capital — yourself as a resource which you invest — in order to produce financial capital, money as a resource that you invest.
So, in the investing world, this is very much a system where money makes money.
But what if you could make money without investing any more than you already have?
That is where leverage comes in. In financial markets, leverage is the idea of borrowing money at one rate to invest it at a higher rate.
Back in my foreign exchange market days, I utilized leverage to carry out the classic carry trade. Essentially, I would borrow GBP at a low interest rate, covert it into yen and then deposit it in a Japanese savings account for a higher rate and make the difference.
Now, what if the interest rate you borrowed at was zero?
And better yet, what if you invested it — like we do in my Crypto Yield Hunter service — in yield-bearing DeFi investments that currently offer annual percentage yields of 151%?
At time of writing, that is the return on offer by investing in the Aave (AAVE, Tech/Adoption Grade “B”) token using my proprietary Sideways Siphon strategy. You can take my DeFi MasterClass if you would like to learn more about that.
But the point is, what if you could borrow money at 0% and invest it for 151% returns?
Is that even possible? Yes, and here is how.
Enter Zero Protocol
To be clear, Zero Protocol is not the only way to borrow at 0% in DeFi.
However, I believe it has the most merit, so it is the one I have delved into the most deeply.
The basic offer here is:
1. Deposit Bitcoin (BTC, Tech/Adoption Grade “A-”) as collateral;
2. Borrow at 0%;
3. And pay it back whenever.
Not to mention, there is no payback deadline. Essentially, you can borrow at 0% and never have to pay it back.
Of course, if you want to withdraw your BTC collateral, you must pay it back. But there is no due date on the loan.
These are the moments where the conditioning you have received from traditional finance on what is possible starts to collide with the expanded possibilities in the world of DeFi.
That simple three-point list above is not something that is theoretical. It is real … and I have actually done it.
In fact, I still have an outstanding loan now at time of writing. I even paid down the debt by $1,000 just two days ago with some Tether (USDT, Stablecoin).
What Is the Catch?
Now, you may be wondering: Where does the money come from? And who in their right mind would lend out their money at 0% interest?
Well, when you take out a loan on the Zero Protocol, there is a one-time origination fee. This fluctuates based on protocol conditions, but my origination fee was 0.5%.
But this does not mean the loan suddenly becomes a 0.5% loan.
Because this is a one-time fee, and because there is no loan term, a 10-year payback period would spread this fee out so that it equates to 0.05%.
Thus, the origination fee could be classified as interest if we are being precise. But that does not take away from how mind-blowing this opportunity is.
If anything, the fact that there is an origination fee should make this more believable, since Zero Protocol is getting something out of it.
But there is more.
Another important characteristic to note is that these are collateralized loans, and they are secured against BTC — a variable- price asset.
That means there is a minimum collateralization ratio that must be maintained to protect lenders from loss and simultaneously provide an incentive for them to lend.
Here, the minimum collateral ratio is 110%. If the value of your collateral falls to a point where your ratio drops below this threshold, you can be liquidated, and your collateral will be given to the lenders.
But to be absolutely clear, let us look at this theoretical example.
In the event of a liquidation, the lender who lent out $100,000 is not going to get their dollars back. Instead, they will now have $109,000 worth of BTC collateral that they can immediately sell to make a $9,000 profit.
And let us be honest here, most people who take out these 0% loans are not going to follow risk-managed trading recommendations like the ones given in Crypto Yield Hunter.
More often than not, they are going to succumb to greed, take massive risks and lose.
Every time that happens and results in someone defaulting on their loan, the lenders profit by acquiring Bitcoin 9%–10% below market value.
And in certain circumstances, the lenders can acquire Bitcoin from defaulted loans at up to 30% below market value.
Even if you do not like the idea of investing borrowed funds in trading strategies, the way to almost eliminate market price risk would be to invest the borrowed funds in a stablecoin yield.
For instance, in Crypto Yield Hunter right now, we have a stablecoin staking investment that is yielding a safe, revenue-sharing yield of 26.78%.
Back when central bank interest rates were at 0%, the superrich were able to effectively raise capital at zero cost, invest it for yield and keep the difference.
The wonderful thing about DeFi is that it often brings these high-level investing strategies within the reach of average investors.
Anyone with $1,000 worth of Bitcoin could use the Zero Protocol to take out a 0% loan in the way I have described in this article.
But as always, I encourage you to do your own research before taking any action.
This article is by no means an instruction manual for the Zero Protocol. So, do not go putting any money into it purely based on what you have read here.
Rather, this article is designed to introduce you to the wonderful possibilities that exist in finance and open you up to similarly amazing breakthroughs in the near future.
But that is all I have got for you today. Let me know your thoughts on borrowing at 0% with Zero Protocol by tweeting @WeissCrypto.
I’ll catch you here next week with another update.