Transcript: Get DeFi Opportunities with Centralized Ease

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Chris Coney: Decentralized finance (DeFi) can be complex. I get it. But just like there is a relationship between risk and reward in investing, in DeFi, there's also somewhat of a relationship between complexity and reward, I’d say. While it’s not an absolute rule, it is safe to say that the more exotic returns tend to be on the more sophisticated end of the DeFi spectrum.

But that is not the end of the spectrum that I want to deal with today. I want to deal with the other end. I want to describe what I call the “CeDeFi cashflow strategy.”

This is ideal for someone who doesn't want to bother with all of the technical setup of wallets and blockchain transactions and isn't interested in the absolute most exotic returns but wants a strategy with solid capital gains and cashflow that can be easy to manage and execute.

Even if you are on the more sophisticated end of the DeFi spectrum as an investor, well, maybe you would want to allocate a portion of your portfolio to this strategy that I'm about to explain, which is more on the safe end.

The clues to this strategy are all in the name. “CeDeFi” refers to the fact that we'll be using a centralized DeFi platform. The “Ce” part stands for centralized, and that cash flow refers to the fact that we're going to be generating cash flow as well as capital gains. Now, when I say centralized DeFi, it means we'll be using DeFi assets. The returns will be enabled by the growth of the DeFi space, but we'll be using a centralized platform to manage the assets and to make executing each element of the strategy much easier.

Now, by using CeDeFi or a CeDeFi platform that I've been personally experimenting with recently, you'll be able to execute and manage this entire strategy on one platform with no technical knowledge whatsoever. Are you ready for that?

Let's dive in there. The CeDeFi platform that I’ve designed this strategy around is Nexo. Now, I suppose you could execute this strategy on another CeDeFi platform, but what I find unique about Nexo is combination of tools that it provides all in one place.

1. I can do fast bank transactions to deposit and withdraw U.S. dollars or pounds sterling.
   
   
2. I can deposit and withdraw a wide variety of crypto assets.
   
   
3. I can earn interest on a wide variety of crypto assets.
   
   
4. I can exchange crypto assets to and from U.S. dollars or pounds sterling — perhaps most important for this strategy.

Now, this is a composable strategy; you don't have to follow what I'm about to say here rigidly because you may already be some way down the road to what I'm about to say here. But I'll explain it in a sequence, as if you just got into DeFi and were sitting with some cash that you wanted to deploy into this strategy with no prior DeFi investments.

Before I get started, though, I have to note Nexo’s limitations. While it is a global platform, there are certain jurisdictions where users can’t access Nexo, including the U.S. states of New York and Vermont. You can see a full list of jurisdictions where Nexo cannot operate here.

If you can access Nexo, the first thing you would do is to set up an account and go through the various verification levels. That's a pretty standard process now whenever you sign up with a financial institution. This is a CeDeFi strategy, and Nexo is an actual company are providing us with this platform to manage a range of DeFi assets and provide us with certain services.

Another good feature about Nexo is the fact that they hold $375 million worth of insurance against, say, the unlikely event that they get hacked or something. As long as the losses are under $375 million, then you would be compensated for your deposits. That’s added security you don’t get in true DeFi. However, it’s also one objection people would have to using a centralized platform like this — the platform is a custodian, meaning you’re not truly in possession of your own assets. But Nexo smoothed that over with $375 million worth of insurance. That's a big bonus.

Now, once you have a Nexo account, the next thing this strategy involves is accumulating capital in an asset that satisfies two criteria:

1. You believe it has long-term growth potential.
   
   
2. You're happy to hold for long-term capital gains.

Now, I prefer to use the very large-cap, blue-chip assets for this. In my personal experiments, I've been using exclusively Bitcoin (BTC, Tech/Adoption Grade “A-”) and Ethereum (ETH, Tech/Adoption Grade “A”) because, in my opinion, they're going to be around for the long haul. I feel confident continually accumulating them.

The first step is where you use classic dollar-cost averaging (DCA) to accumulate your preferred asset. You may choose to use BTC and ETH or maybe another blue-chip DeFi asset. Dollar-cost averaging, that simply means buying the same amount of an asset every day or every week or every month no matter what the price is. When I say the same amount, I mean putting the same amount of dollars or pounds in, not buying the same quantity of the asset.

Now, I personally do this weekly. The idea behind that is that you end up averaging out the price that you buy at. Some weeks, I buy cheaper and some weeks I buy higher; it doesn't matter. What matters is that I do it consistently to allow the law of averages to work in my favor.

This is also why it's important to adhere to those two criteria I mentioned above for accumulating an asset — that you believe it has long-term growth potential, and you’re happy to hold it for long-term capital gains.

A great resource for selecting which asset to target is the Weiss Crypto Ratings. If you refer to the Weiss Crypto Ratings and then select an asset on the upper end of the rating scale, that can help significantly reduce your risk and makes it much easier to select or shortlist assets that may be appropriate for this strategy.

Dollar-cost averaging is a strategy all on its own. Some people just do that and then leave it. You can execute dollar-cost averaging on Nexo quite easily by depositing some U.S. dollars — or pound sterling in my case — and then use their “buy crypto” feature to buy your desired amount each week.

I think it's important to keep the amount you spend the same. Otherwise, it messes up the average.

Now, go to this website, dcabtc.com. Of course, this is exclusively for Bitcoin, but it’s designed to prove the DCA strategy if you don't already buy into it. Here, you can use their calculator to plot the performance of the DCA strategy historically.

You could say, "If I started three years ago and I put $100 per week into Bitcoin, what would be the profits and the gains and all that kind of stuff?"

That'll show you exactly how this consistent strategy is absolutely superb.

Now, back to the CeDeFi strategy. As soon as I swap some of my pounds sterling into an asset — let’s say for this example I chose Bitcoin — Nexo immediately starts paying the interest on my Bitcoin deposit at the flexible rate. Per Nexo's rules, it takes 48 hours to get my first interest payment. But after that, the interest is added to my Bitcoin balance every day automatically.

This is where the cash flow part of the strategy comes into play. What I would do then, once per week, is swap the Bitcoin I've earned in interest into pound sterling and then withdraw that to my bank account as additional income.

What's interesting here is I'll still have the same amount of BTC principle that I've accumulated through my weekly buys, while at the same time being able to enjoy some of the income from it. This could even be done as part of the weekly buying routine.

Every Saturday, let’s say, I would do the following:

• Log in to my Nexo account.
  
  
• Swap the BTC interest that I'd earned that week into pound sterling.
  
  
• Withdraw the proceeds to my bank and note down that amount as income for tax purposes.
  
  
• Buy my weekly chunk of Bitcoin using Nexo's “buy” feature.

And that would be it until the following week.

Now, I'm an avid record keeper, which you have to be for tax reasons. But I am an avid record keep anyway. I keep a spreadsheet which records each of my weekly Bitcoin buys in my case so I can keep track of the dollar-cost averaging element and the capital gains. I keep another sheet with a record of the weekly interest withdrawals that I make because in the UK and probably the U.S., those are two types of tax: I'm going to pay capital gains tax on my DCA purchases and income tax on the interest payments. I keep those completely separate.

Because the BTC interest payments are added to my balance, I use the dollar-cost averaging spreadsheet to work out how much Bitcoin represents my interest payments and thus how much Bitcoin I need to sell as income each week. That's just a simple formula, which helped my spreadsheets help me do this.

The simple formula is where I take the total amount of BTC that my spreadsheet tells me that I've purchased using the dollar-cost averaging strategy and I just subtract that amount from my current Bitcoin balance on Nexo. Whatever's left over is the interest that I've earned and is ready to be swapped into British pounds and pulled out as income.

In the UK, roughly a third of that interest needs to be set aside for tax purposes. But the remainder can be spent as after-tax income.

On the surface, this might look like the behavior of someone who's generating income from their savings. It's similar, but it's not quite the same. Because I personally have confidence in the long-term price appreciation of Bitcoin, I can quite happily sell off the BTC that I earn in interest payments while still getting a great return on the money I put into Bitcoin.

Because I'm basing the strategy on an asset that I want to hold long term, I can also take advantage of fixed-term lending on Nexo. This is, for example, where I can lock my deposit for a period of, say, one month and I get an additional 1% APR. Because I plan to hold this asset for much longer than one month, it makes no difference whether it's locked or not.

I used to just reinvest everything I made, but I got to the point where I realized I didn't want to be the richest person in the graveyard. For me, this CeDeFi cashflow strategy strikes the perfect balance between enjoying some of the benefits today with the near-instant income and investing for future gains. If you were just putting your savings away and pulling all the interest out, you wouldn't actually be gaining anything on the principle, would you?

Now, I said this was a composable strategy. The nuances really depend on your starting point. If you're starting out from zero, you might need to let your Bitcoin interest accrue a bit before it's worth selling it off and taking it out. But remember, the income that this strategy throws off should consistently increase very slowly for two reasons. First, because your weekly buys let you accumulate more capital in your chosen asset, from which you earn interest, and second, because the value of your chosen asset should rise if you've picked a good blue-chip asset that's got long-term growth potential.

If you already have an amount of Bitcoin, you can kick start the strategy by putting your BTC in Nexo to begin with and starting that cashflow process immediately.

The major portion of the returns for this strategy will be in those long-term capital gains from dollar-cost averaging into your chosen asset. The income this generates is just extra gravy.

Now, in my case, when the Bitcoin price is higher, well, my interest payment will be worth more. And when the price is lower, it will be worth less. I mean, you win either way because the week the price is lower is the week that your weekly buy-in acquires you more of the asset for the amount of money that you put in.

Again, this is designed to be a very conservative strategy.

The balance is good returns with the greatest of ease of execution. That's the key point here. I did say that this is designed for someone with no technical knowledge and someone who doesn't want to mess around with that kind of stuff.

My work with crypto education has always had a big focus on accessibility. And this strategy is about as accessible as it gets. It requires very little time to execute, very little time to manage, it's on the low end of the risk scale and it can produce consistent returns.

I mean, what's not to like?

Some might say this strategy is boring … but I'll take boring and consistently profitable over risky and uncertain any day of the week.

But that's all I've got for you today. I'll be back with another episode next week. But until then, it's me, Chris Coney. Bye for now.