Almost every adult on earth now owns some crypto currency! And here is the quickest way to lose it! Protect yourself and your investments using a little knowledge

Something that I have written to you about previously is, it appears, beginning to gain traction.

In one sense, it is no surprise.

The current mania phase of the real estate cycle is upon us. With that comes more and more speculative behavior designed to commence a race to the bottom to bring in the least creditworthy clientele as possible.

And then lend them previously unobtainable amounts of borrowed money.

Not only do the standards set to obtain this finance continue to fall, but the scale and breadth of collateral put up to obtain it also becomes riskier.

Nowhere is this trend more acute than loans lent against cryptocurrencies.

The facts are that today, more and more average folk claim to have or own at least one cryptocurrency. Which instantly means that these types of loans are becoming more available, not less.

It is imperative you are across this trend and what you stand to benefit and potentially lose to.

Because this type of risky lending is coming for your crypto wallet.

And the promises made to you to gain access to that same wallet will seem too good to pass on.

Let’s look now at the benefits and risks here, the promise that bitcoin should be treated as a tier one asset like your property, and how this is likely to end once boom turns to bust.

While acknowledging that the below article is Australian specific, this is in fact a global trend.

From the above article.

A new form of lending is emerging in Australia, and everyone, including the lenders, agrees it’s risky. So, what are we talking about here? A handful of outfits are offering loans in exchange for cryptocurrencies.

That is, within any given lending arrangement, Bitcoin and Ethereum, for example, are accepted as collateral — an asset offered up as security for a loan.

This type of lending kicked off in 2017 and ramped up during the pandemic.

Again, such news isn’t groundbreaking, this type of behavior has been around for many years now. What ‘should’ immediately grab your attention, however, is the timing of this article.

With recent history giving us yet another all-time high in price for bitcoin, the frenzy surrounding this achievement gets even louder. But you of course know something almost no-one else does.

The history of the 18.6-year Real Estate Cycle.

And our entry into the mania phase of the current cycle. And with this, the ramp up of credit creation for the purpose of speculative lending.

So, no. None of this is a coincidence. It is additive to the increase of speculative lending to the masses.

According to the article, millions of Australians are reported to own at least one cryptocurrency, a few Australian firms are engaging in lending to retail or everyday mums and dads using crypto as collateral, and at least five big Australian financial companies do it too.

It does beg the question; just how many of these millions are experts in the use of these cryptos as leverage? Seems ridiculous to think they “all” are, right?

This lending practice is, however, perfectly legal, and the lenders are properly licensed. Could that mean this dynamic can overcome the knowledge gap most crypto owners need to grapple with?

Even though those same lenders are on record saying this type of borrowing is risky.

Let’s look now at what is involved.

Firstly, the obvious question. Where are these crypto lenders actually getting their finance? The big four banks in Australia aren’t interested in having any exposure to this, and yet these lenders do have availability to credit. We are talking about shadow banking systems and private equity.

According to the above article, this is how it works.

A typical crypto loan is valued at roughly $140,000.

The lender makes money by borrowing cash at an 11 percent interest rate, and lending that on to customers at a higher 15 per cent.

The margin here is 4 percentage points.

So, a game of arbitrage. Or, as the financial system likes to call it, borrow short to lend long.

The difference or margin is how the lender profits.

Now, for the borrower, there’s another calculation that they must consider. Something that everyone who has borrowed money once before would know.

It’s called a LVR or loan to value ratio. Typically, for a standard mortgage, the LVR is 20%. In other words, you need to have at hand a deposit equal to 20% the value of the price of the property brought to enable you to obtain the remaining 80%.

When it comes to these crypto lenders, some will offer a 50% LVR ratio. On the surface, this seems quite reasonable, even morally correct. It means their borrowers aren’t getting in over their heads and allows an equal spread of risk between lender and borrower.

And thus, we see the explosion of lenders like the one below.

“Currently, if you walk into a typical bank, if you have equity in your Bitcoin, a bank is not going to lend it to you,” Vield co-founder Johnny Phan told the ABC.

“They only lend against property or against your credit profile.

We also do that in same manner, but we’re using Bitcoin instead of property, for the security.

In short, if Bitcoin is a legitimate asset, why shouldn’t it replace a dwelling or house as a type of mortgage, or security for a loan?”

Two things stand out for me here. One that bitcoin either is or should be treated as a legitimate asset. Now, is that really the case? Sure, these lenders, like Vield, believe it is. However, the biggest banks in the country clearly do not believe that’s the case.

Secondly, it’s that small question of the LVR ratio, some of which are around 50%. Can you recall at any time during the duration of your mortgage on your own home the value of said home falling by 50% at any stage of the term of the loan?

Whereas for crypto, I’ve seen falls like this in an hour.

Seems to me to be in this business you actually need to have such leeway, rather than any attempt at responsible lending on behalf of your customers. But I digress.

Any way you cut it, lending against cryptos is here, and apparently here to stay for the immediate future. And given the timing of the real estate cycle, yet another example of speculative lending that continues to ramp up.

You may already have a loan staked by your personal crypto portfolio or indeed consider using it as a means to sidestep the still significant hurdles dealing with the traditional banks entail.

Fine, that’s your choice.

But fair warning to you. You’d be remiss to not heed the warnings from those who have experienced the other side of this particular coin (pun very much intended).

In July 2022, Crypto enthusiast Bayani stumped up 1.6 Bitcoin as collateral for a $20,000 loan from US-based crypto exchange and lender, Celsius.

But the price of Bitcoin plummeted and Celsius ran into financial trouble.

He received emails from the company informing him his LVR was dropping, and he was asked to provide more collateral.

He was hesitant to do this because, he says, there was speculation on social media the company was in financial trouble.

He ended up losing all his Bitcoin, worth over $50,000.

It gets worse. Even though the company collapsed, and liquidators were called in, the way they obtained finance meant that another bank or lender still had the right to get their money back. Bayani received some money back from the liquidators, but the majority then went back to paying off the original loan of $20,000.

It is this complicated web of exchanges and lenders who may, or may not, have the ability to repay their own debts, holding your cryptos as collateral and you with a contract from yet another lender saying you will repay that loan that awaits you.

Rarely will I bore you with what normal economists think, but here I’ll make an exception.

Independent economist Saul Eslake says the collapse of both small and large financial institutions, using cryptocurrencies as security, can present big risks to Australia’s financial stability, especially if lending against cryptocurrencies becomes widespread.

“The risk in circumstances like this is that people who find themselves with significant exposures,” he says.

“In the event that there’s a dramatic reversal in the value of those assets… people sell what they can, rather than necessarily what they should, in order to get out of a sticky or illiquid position.

“And that’s how contagion happens, from what might be a small asset class of no great systemic significance on its own, to assets that do matter.”

But what if this is you, and you can do nothing to both stop the fall in value of your pledged crypto assets, AND find yourself in a position where any and all asset classes are falling in value too?

That day is arriving, sooner than you think.

Imagine knowing ahead of time this was coming. How much peace of mind would you have been able to simply opt out and avoid the chaos the majority of people will now face alone?

It comes down to timing the market, and becoming our newest Boom Bust Bulletin (BBB) member is how you get it. Let the BBB guide you on the inherent timing of the economy only knowledge of the land market can give you.

Each month this history and knowledge will be yours via monthly written editions and video postcards that will help explain the real estate cycle like never before.

In time, this guidance will give you the confidence to track and time the cycle yourself, your true market edge.

Not just for yourself either, but your family too. After all, it is this cohort these lenders have already identified as their newest borrowers in waiting.