Well, here’s a scenario: Suppose you have owned Bitcoin since 2012 and now you have a million dollars of Bitcoin, but when you sell them you will have to pay ~$250,000 in capital gains tax, since you live in California. You still endorse owning the Bitcoin because you think it’s headed for the moon, but you want to use that capital for some other stuff, like buying a Tesla.
In this case you could deposit $200k of Bitcoin into Compound, withdraw $100k of USDC, cash the USDC out for dollars at Coinbase, and buy your Tesla. Now you are still exposed to the upside on all your Bitcoin but you also have your Tesla.
In practice I actually don’t know what kind of taxable event “taking out a loan at Compound” is so I am not sure this was a correct way to minimize taxes. (On the other hand, even if it’s not, I bet people are doing it; the IRS actually looks if you sell Bitcoin on Coinbase, but I don’t think it looks at what you’re doing with Compound.) But at least it definitely preserved your exposure to Bitcoin. That’s a way to “put it to good use” even when it just sits there.
This is one example. As I mentioned in the post, I’m not sure what is driving the majority of the demand.
So then, to get back the bitcoin in 12 years when it’s worth a billion dollars or whatever, you just have to make back the million USD you spent (plus interest), convert to USDC, and pay back (with interest)?
And then the risk you run is that bitcoin falls between now and that time, at which point your collateral would be liquidated to the highest bidder, and you’d be left with a Tesla but no bitcoin. (Not such a bad risk, all things considered.)
It would be even easier than that. Suppose for the sake of simplicity you put your whole million dollars of Bitcoin into Compound. You could then withdraw USD up to the point where you hit the collateralization ratio set by Compound, e.g. if the collateralization ratio is 150%, you could withdraw $666k of USD.
When Bitcoin goes up 1000x, your collateral is now worth a billion dollars, but you have still only borrowed $666k (plus interest). You have way more collateral than you need. So you could just withdraw 99.9% (minus interest) of the collateral, if you wanted. You don’t even have to repay anything to do that.
Well, here’s a scenario: Suppose you have owned Bitcoin since 2012 and now you have a million dollars of Bitcoin, but when you sell them you will have to pay ~$250,000 in capital gains tax, since you live in California. You still endorse owning the Bitcoin because you think it’s headed for the moon, but you want to use that capital for some other stuff, like buying a Tesla.
In this case you could deposit $200k of Bitcoin into Compound, withdraw $100k of USDC, cash the USDC out for dollars at Coinbase, and buy your Tesla. Now you are still exposed to the upside on all your Bitcoin but you also have your Tesla.
In practice I actually don’t know what kind of taxable event “taking out a loan at Compound” is so I am not sure this was a correct way to minimize taxes. (On the other hand, even if it’s not, I bet people are doing it; the IRS actually looks if you sell Bitcoin on Coinbase, but I don’t think it looks at what you’re doing with Compound.) But at least it definitely preserved your exposure to Bitcoin. That’s a way to “put it to good use” even when it just sits there.
This is one example. As I mentioned in the post, I’m not sure what is driving the majority of the demand.
Right, ok!
So then, to get back the bitcoin in 12 years when it’s worth a billion dollars or whatever, you just have to make back the million USD you spent (plus interest), convert to USDC, and pay back (with interest)?
And then the risk you run is that bitcoin falls between now and that time, at which point your collateral would be liquidated to the highest bidder, and you’d be left with a Tesla but no bitcoin. (Not such a bad risk, all things considered.)
That’s pretty awesome.
It would be even easier than that. Suppose for the sake of simplicity you put your whole million dollars of Bitcoin into Compound. You could then withdraw USD up to the point where you hit the collateralization ratio set by Compound, e.g. if the collateralization ratio is 150%, you could withdraw $666k of USD.
When Bitcoin goes up 1000x, your collateral is now worth a billion dollars, but you have still only borrowed $666k (plus interest). You have way more collateral than you need. So you could just withdraw 99.9% (minus interest) of the collateral, if you wanted. You don’t even have to repay anything to do that.