SLP326 Dylan Leclair Using Fiat Debt For Bitcoin Stacking

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Dylan Leclair of Bitcoin Magazine and UTXO Management joins me to talk about the fiat debt system, as well as why and how some people use the system against itself. We get into:

  • The current situation on the fiat standard
  • Why consider using debt to stack Bitcoin
  • The advantages of using this approach
  • Costs and risks
  • Avoiding Liquidation
  • Bitcoin mining using fiat loans
  • Trends and where this is all going

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Stephan Livera links:

Podcast Transcript:

Stephan Livera:

Dylan, welcome to the show.

Dylan LeClair:

Stephan, thanks for having me, man. A longtime listener of the show, a lot of content in this space so I can’t say I’ve hit every one, but I’ve definitely listened to a lot of the technical episodes and it’s helped me out a lot. So it’s quite cool being on here.

Stephan Livera:

Yeah, for sure. And I’m a fan of your work—I’ve seen you’ve really come up in the last year or two. You’ve been putting a lot of good quality material out there. And I know there is this theme that has come across—obviously you’re known for a few things, right? You talk about on-chain analytics, as well as writing in the space, research. But I’ve also seen you talk about the use of debt as well. So I think that’s really interesting and an interesting theme. But maybe just first for anyone who hasn’t heard of your work, maybe they’re new—tell us a little bit about yourself, like how you got into this Bitcoin stuff and what your focus has been?

Dylan LeClair:

Yeah. So right now I work with Bitcoin Magazine, I’m head of market research there. Bitcoin Magazine has a premium markets product. So we put out Bitcoin and just like generally financial market research on a daily basis. It’s called The Deep Dive. And there’s free and paid tiers there, but we look at what’s happening on-chain, look at what’s happening with derivatives and keep readers informed, but really we try to paint it all with a 10-year—or actually probably longer than 10-year—like this hyperbitcoinization theme. Bitcoin is the best money, the best monetary asset the world’s ever seen. And so we’re documenting that journey with data. So that’s my day-to-day. In terms of how I got into Bitcoin is just I stumbled upon this thing that grabbed my attention in the later years of high school and my freshman year of college, studying business in college, decided it was not worth the value that I was paying in, so I dropped out and just said, I’m trying to figure out this Bitcoin thing and worked a job in the meantime, but long story short—stumbled into a role at Bitcoin Magazine and it’s carried me here ever since. So I’m really grateful to come along this journey and it’s pretty cool because Bitcoin is just kind of this arena of ideas. And for me—someone with no credentials—it doesn’t matter, because it’s more about the merit of your ideas and then what you’re putting out there.

Stephan Livera:

Absolutely. I think that’s really a testament to the quality of the dialogue in the Bitcoin space that it’s not really about like, Oh, what university did you go to? It’s not about that at all. It’s really just about like, what is the quality and the value that you’re bringing for listeners or readers or consumers of whatever material you’re putting out there. And I definitely see you as a bit of a rising star in the movement as it were. So that’s cool to see. So yeah, we were chatting about this idea of using debt in the Bitcoin world. And I know this is something you’ve spoken about and I guess it can seem like a bit of a taboo, right? Because the way most of us were raised is like, Oh, debt is bad. You should save. You should not have too much debt. Or if people are used to looking at the typical—let’s say they pick up a personal finance book, they might read Dave Ramsey or someone like that, you know? So can you tell us a little bit, how do you see the landscape of it? Set the scene for us? What is life like under the fiat standard, or at least up until recent years?

Dylan LeClair:

Yeah, so when you’re looking at how the fiat monetary system works—we moved away from the gold standard and Bitcoiners have talked about that quite a bit—but with fiat money, every dollar that’s in circulation was created through credit extension. It was lent into existence by a commercial bank. So debt is a necessity in this world that we live in. Regardless of if you choose to take on any debt, which depending on the circumstances—and for the last four years, those circumstances have been ripe—taking on debt is in your favor if you use it wisely. Obviously, six figures, $100,000-$200,000 in student debt may not be the most prudent thing, but the richest people in the world never sell their assets and just continue to use debt to their advantage to get richer under this fiat monetary system. But one of the important things to understand with debt and just investing in general is understanding a balance sheet and understanding the asset and liability side of the balance sheet. I first had this Aha moment when I read Pierre Rochard’s Speculative Attack piece which he wrote in 2014, which is really mind-blowing. I’d encourage everyone to go read it. It’s on the Nakamoto Institute. It’s a great website—a lot of gold in there just in terms of timeless content. But really, anybody that holds Bitcoin, anybody that has even some Bitcoin on an exchange, Bitcoin in cold storage, even—I’d go as far as saying just any sort of Bitcoin exposure. I mean, I would obviously say, hold your own keys, stack sats to cold storage, but even something like exposure to GBTC or anything of the like—if you have any sort of Bitcoin exposure on the asset side of your personal balance sheet or company balance sheet or whatever it is, and you also have liabilities, you have debt, you have loans outstanding that you haven’t paid—well by definition you are somewhat of a leveraged Bitcoin investor or leveraged Bitcoin holder, because you acquired that Bitcoin and the other choice was paying off that debt and you chose not to. So whether that’s credit card debt, a mortgage, anything—you decided to forgo paying that to acquire Bitcoin. And over the last 10 years, Bitcoin has been the best performing asset ever. The compound annual growth rate conservatively is we’ll say 100%. It’s somewhere in those lines. If you go from the first time Bitcoin had a market price, it’s like 200% compounded annually, but no one really saw those returns, but regardless, a lot of people will say, Don’t take on debt to buy Bitcoin, without really understanding that if you have any sort of liability, if you have any sort of loans outstanding and you have Bitcoin on the assets side of your balance sheet, well you are essentially borrowing to buy Bitcoin. And so your hurdle rate is whatever that interest rate you’re paying on that debt is. For some people on a credit card it’s 15%. And I’m not saying, Go do that. If it’s a personal loan at 8% or a mortgage at 3%, you are not paying that interest. That interest is compounding and the opportunity cost is you acquired some Bitcoin. And so a lot of people are doing this without even really realizing it. Michael Saylor is doing it at an institutional scale, but these are the things that you have to consider as we’re going towards this new monetary standard.

Stephan Livera:

Yeah, really interesting. And so that definitely echoes the point that Pierre made in Speculative Attack, as you rightly pointed out, that even if you have some debt, to some extent if you think about your balance sheet, you are in some sense levered. Or you at least made a choice and you could have paid off that debt, but instead you’re purchasing Bitcoin, or you’re levering in some sense to buy Bitcoin. Now it’s important and prudent to say there are degenerate ways to do this, and there are conservative, or at least more conservative ways to do this, right? So obviously people go to—pick the random shitcoin casino of choice—people can lever up. That’s also levering up on Bitcoin. But there are other ways as well that you can go into debt. For example, there’s the difference between the types of debt. So with some of the loans that you might get out of your fiat bank, it’s not like they are going to reclaim your Bitcoin. It might be an unsecured loan, or it could be secured by something else. So for example, you can have a car loan secured by the car. You can have a home loan secured by the home. And so there are other ways to access credit. It’s not necessarily going to the shitcoin casinos and doing leverage trading on that.

Dylan LeClair:

Yeah, of course. That’s a great distinction to make. There’s all these derivative exchanges around the world where you can essentially speculate on the price of Bitcoin going up or down, but if we’re talking about borrowing against your Bitcoin going 2x levered long on a perpetual swap contract, I mean essentially you’re borrowing against your Bitcoin. Because you’re not actually getting a loan from a bank and applying, it may not feel like that, but it’s the same thing. But the most important thing to understand when you’re talking about leverage and increasing your Bitcoin holdings is you never, ever, ever want to become a forced seller. That’s the worst thing that can happen to you as someone that’s looking to accumulate Bitcoin. So if we’re talking about Michael Saylor, he got a little bit of heat in April when he was like, Take on debt, mortgage the house—buy Bitcoin. And he got a lot of heat. And he was doing that at an institutional scale with billions of dollars. But I think the thing to understand is: Michael Saylor took out half a billion dollars on a junk bond raise at 6%. But that principle is paid off in six or seven years, and he’s just paying a 6% coupon on that debt. So the breakeven price for when he purchased Bitcoin at $37,000—the breakeven price in 2027 is $60K. So he’s not going levered long on BitMex. The worst thing you could possibly ever do with Bitcoin is put yourself in a position where you have to sell and you don’t want to. I think that’s just a really important distinction. Unsecured debt—there’s still ways to acquire leverage [and] acquire capital in a fiat standard without putting your Bitcoin holdings at risk.

Stephan Livera:

Of course, yeah. And I think the other thing people are probably thinking about, and again, it turns into, What monetary system are we living under? Because if you talk to, say, our grandparents, someone at that age, the way they would think about it or would have talked about it is, Oh, no, don’t go into debt. You should be prudent. You should save up. You shouldn’t be levering up. And yet, as you rightly point out—in the fiat financial system today—it rewards people who take out this debt early, right? And so even—listeners, if you’ve seen the work of Guido Hülsmann, he talks about this. He says, Even new graduates coming out of university—What’s their incentive? It’s to borrow. And the example he uses is to borrow and buy a house, because he knows that over time, the value of that loan in real terms is coming down over time. And typically, the typical person who starts a new job is getting promotions over that time period. So that’s just the incentive, is that people have an incentive to go into debt, to borrow to buy things that they want—or in this case to buy Bitcoin. So I’m curious, do you have any thoughts to add on that? Or should we get into maybe what it looks like in practice for people who are doing this?

Dylan LeClair:

Yeah, the one thing I preface with this whole conversation is that we’re truly living in unprecedented times. Historically we’ve seen periods of basically negative real yields, right? So interest rates, Fed fund rate, global central banks around the world, are pegging interest rates at 0% because debt burdens are so high that basically everybody in the economy wouldn’t be able to service their debts and essentially everything would collapse if rates weren’t this low. So if you have a 3% loan, well inflation according to the official government statistic is 6%. I think everybody kind of understands it’s a lot higher than that. So your borrowing costs, your interest rate, your hurdle rate—in real terms today, and really for the last decade if you’re looking at it in terms of how much inflation actually is—maybe broad money supply M2, and not CPI. Yields are really negative. And so that’s an important thing to understand here, is that we’ve been in the secular downtrend since 1981 globally with interest rates, and now debt burdens are so, so high that central banks, governments, are trying to erode the real value of these debt burdens, and they’re trying to do it by running inflation hot. So when we’re talking about borrowing money to buy very a volatile asset like Bitcoin—and in BTC/USD terms long-term we understand that the purchasing power is going up and to the right—but there is trading volatility, that’s for sure. Or really just any other asset. We’re prefacing it with saying we’re in a time where real yields are as negative as they’ve been in basically anybody’s lifetime.

Stephan Livera:

Absolutely. And so it’s just operating in this weird environment where inflation—and it’s like this concept of the iceberg, right? Like the amount that you see above the water is this amount, but actually the amount you see below the water is way bigger. And so what we should have seen theoretically in a real free market is that we would have this growth deflation—the cost of things is coming down over time. But we’re actually seeing the cost of things go up over time. So it’s like that amount below the water is that unseen benefit that we should have had. And so it all comes back to that point around just how much inflation there really is because that 6.1% is just the amount above the water. We’re not even counting all of that iceberg below the water part. So it really is just a lot of inflation that we are living through, and so that’s why I think people who are switched on, people who have a fundamental thesis about what they view Bitcoin is—it’s going to become the money of the world—that’s the thesis, essentially. And under that sort of condition, we anticipate the price of Bitcoin to rise over the long-term. And that is where this idea of either borrowing against some Bitcoin or taking out a fiat loan to purchase more Bitcoin on the basis that your cost of interest is less than the amount that Bitcoin is rising every year aka CAGR (compound annual growth rate). What do you think—fair summary? Okay, so let’s talk a little bit about how this might work and what kinds of interest rates are available. And maybe we can sort of spell it out a little bit, like let’s say we’re just a retail pleb, versus the rates that are available to people who are maybe higher up or have more capital available.

Dylan LeClair:

Yeah. So there’s obviously a spectrum—does someone have assets or not? The crazy thing is in 2021, we’ve reached this threshold, this financialization of Bitcoin. And that sounds like a bad word—it’s not, it should be welcomed. Where, if someone has a significant amount of Bitcoin holdings, similar to if some family has a huge real estate portfolio, you really never have to sell. And that wasn’t true for much of Bitcoin’s history, but now it is in the sense that if you have millions and millions—or whatever that number is for you or your business or your family where you’re comfortable, and probably an order of magnitude more than where you’re comfortable—you can just simply borrow against your Bitcoin, you know, 1% of your holdings, and live off it very comfortably. And when that interest comes time to be repaid, you borrow against it again. Obviously that’s not the case for everybody—we’re going from the retail pleb, right? So you’re stacking sats, you’re trying to acquire as much of this hard money as you possibly can. The important thing to think about if you’re looking at any sort of debt—credit score is still obviously really important in this world we live in, in this fiat world. What’s your cost of capital? What can you access? If you’ve been paying your mortgage for 30 years and you can pull and you can borrow at 2% or 3%, that’s a fantastic deal and it’s definitely something to consider. One of the things that is really important to also consider is, are you able to cover these interest payments? Is your disposable income enough to cover this debt without having, again, to become a forced seller of the thing you’re trying to acquire? Which is Bitcoin. Because there is volatility risk, right? So that’s something where, if I’m borrowing even at rates that sound really high like 10%, if Bitcoin drops down 50%, am I going to be okay for the next year or two or three being—on paper—underwater? That’s something to definitely consider. So there’s obviously like personal loans—not recommending this, but even a credit card at 15% if you’re just spending your day-to-day and stacking a little bit more to your cold storage—that’s something that has worked for people if they’ve done it throughout time. Then we have the collateralized Bitcoin, which I will go out and say: I’ve looked into a lot of these options and I think Bitcoin as collateral will become the cheapest borrowing rate you could possibly find anywhere in the financial system. Because you have a mortgage, which is basically your home equity line of credit, so your bank extends you some credit and it’s secured by the house—that’s the lowest rate you can get. And maybe in some private Goldman Sachs brokerages account you can get Fed funds plus 50 basis points, or 75 basis points. But for the most part the home collateral is the most accessible for the average person. And most people—if they have a mortgage—maybe have some equity in there. But Bitcoin as collateral compared to a house is orders of magnitude better, and for lenders I think they’re just starting to figure this out, right? Bitcoin if fungible, liquid 24/7/365 in every jurisdiction on the planet. And the volatility—yes, your house isn’t going to draw down 80%—Bitcoin might, and it might do it in a week. I’m not saying I predict that, but it’s happened before. But with Bitcoin, you can overcollateralize. And so really for lenders, I think you’re just starting to see lenders wake up and realize, Oh my God, this is a no risk, no loss business when I’m lending against overcollateralized Bitcoin! And so because of this reality, I think Bitcoin collateralized loans become the lowest rate you can find anywhere in the world, and you’re not going to need a credit score to get that. But it’s important to preface it with saying: you shouldn’t do this with your whole stack. Because worst-case scenario is: you always want to be able to lower that loan-to-value ratio. You always want to be able to overcollateralize if the exchange rate BTC/USD goes down, because all of this—the ability to borrow against your Bitcoin forever—there’s a big assumption there. And the assumption is that the Bitcoin price goes up, which we know is a mathematical certainty or inevitability, and that may sound irresponsible, but just understanding the fiat system, understanding the monetization of Bitcoin—that’s the long-term game. But the short-term is a lot of uncertainty. Like, whenever we’re talking about this, there is risk, but you want to be able to mitigate those risks. And doing any of these strategies with a large part or all of your stack puts you in a position where you really can’t mitigate anything.

Stephan Livera:

Right. And I think psychologically the risk as well is just too great, that it’s one thing to have a high percentage of your net worth in Bitcoin, but then it’s another to actually lever up even on top of that and place yourself at a significant risk. Versus, if you were conservatively using debt to stack. And so I think there’s a few points I wanted to make as well. One point is that it doesn’t necessarily mean everyone has to go out and get loans to buy more Bitcoin. It could just mean that you understand the fiat system and use it in some sense in your favor. So, as an example, you might already have a home loan, and you might already have a very low interest rate on that. And so, whereas some people have this mindset of, oh, I need to pay it down as quickly as possible. Instead, you strategically pay the minimum on your home loan for your house and then use the rest to stacks sats—well that’s an example that’s relatively conservative, right? Like you’re not actually going into debt to buy Bitcoin. It’s just that you are strategically paying the least on your home loan because you’re realizing, Hey, the value of this loan is going down over time in real terms. So I’m best on paying the minimum there so that I can stack the max number of sats. That’s one example, right?

Dylan LeClair:

That’s a fantastic point. And that was what I was trying to communicate. At the beginning with the asset and liability side of your balance sheet, everything’s a trade-off. And so obviously if you have liabilities and you have these payments due—pay them. But that principle that you may pay off because Dave Ramsay said so because it’s the conservative thing to do and the right thing to do—well, are you going to pay that down for your house that’s going up by 5% or 10% a year? Or are you going to acquire Bitcoin into your cold storage that’s going to go up by whatever it does over the next decade. Probably an order of magnitude more, too, than your house. And so that’s a great point to make, and it may not be the most obvious for many.

Stephan Livera:

Right, because I think for people who have not had accounting and finance training, they’re not going to necessarily be thinking in those terms. They might’ve just thought in a simple, Oh, just pay it down as quickly as possible. Or sometimes you might—and in fairness this is a psychological thing, you might psychologically feel bad about having debt—and so the idea is, Oh, I want to get rid of debt as quickly as possible. But at the same time, we are potentially leaving some sats on the table there if we do that, because it means it’s sats forgone—you could have purchased sats. And so that’s important to think about also. So let’s talk a little bit about this idea of—and this idea has become a popular thing recently with some articles talking and popularizing this idea of Buy, Borrow, Die, right? It’s this idea that rich people—and as you mentioned earlier, I’m sure you’re familiar with this idea—it’s this idea that rich people don’t necessarily sell their assets. They just borrow against them, whether that is a stock portfolio, whether that is their property portfolio, whether they’re a tech billionaire and they have stock in their own company and they just put some stocks up against to borrow that to use for day-to-day fiat spending. And so I guess there are different ways to think about this, right? So as an example, you could think of it like, Okay, I’ve got some coins. So where we’re going with this is there’s different purposes of using the debt. So high-level, let me spell out three examples, and maybe you can just add whatever you’re thinking on it as well. So one is just stacking more sats, right? You just want to be able to essentially lever up. Number two is you might want to set up a Bitcoin mining operation. And so instead of paying sats to buy Bitcoin mining equipment, you could use a loan and use borrowed fiat to fund that Bitcoin mining operation, which might be more optimal. And then three is you might be living off your stack, right? This is Buy, Borrow, Die, that you are trying to parallel what rich people are doing. Let’s say maybe you’re at an advanced stage of your own life—sixties, seventies, eighties. And you’re thinking, Okay, I’ve accumulated and now I want to be able to live off that stack. So that’s a few examples. Do you have anything you wanted to add around those purposes of using debt?

Dylan LeClair:

Yeah, I think specifically we’re seeing a lot of mining—it’s extremely lucrative right now. Since last summer the Bitcoin price has gone up 5x or 6x and then the hashrate hasn’t increased, but it hasn’t fallen. So you’re seeing the hash price—which is miner revenue divided by hashrate—that’s essentially how profitable a marginal unit of hash is for miners per dollar. That’s gone up 3x or 4x in the last 15-18 months. And so mining—you can plug in any machine over the last three or four years, and depending on your power source, obviously, you’re deep in the money. Mining is extremely lucrative right now. And so you’re seeing a lot of people say, Hey, I want to get into the mining business, without maybe the expertise, ot you have hosting companies like Compass and a lot of these other companies. I’m not saying these are good or bad investments, just listing them off. And a lot of people [looking to start] Bitcoin mining say, Hey, maybe I should sell some Bitcoin [to mine]. The things to consider and there’s a lot of variables here, is: you’re going to breakeven on your dollar amount, most likely, probably within 12 months with what hash price is looking like, and just how large these margins are for Bitcoin mining. The thing to consider though, and what you really have to evaluate if you’re looking at mining in particular, is that you’re basically guaranteed—with Bitcoin mining and the game theory and then what the hashrate’s going to do—hashrate is going to rise forever and your satoshi revenue is going to be guaranteed to fall forever. With the difficulty continuing to ratchet up with the halving in 2024. So it’s not very optimal depending on where you are on the cycle. Sometimes it’s a great time to sell some Bitcoin for miners, but a lot of people get burned by doing it. So it’s pretty optimal if you can say, Hey, I’m just going to borrow against 3-5% of my stack and I’m going to buy some ASICs. And that rate is what? 5-6%, maybe 3%, maybe 8%, but that’s a different story. And so purchasing ASICs and plugging them in and having those turn out dollar revenue and satoshi revenue when your cost of capital—when your hurdle rate—is not Bitcoin, it’s not BTC, it’s 5-6% annualized in dollar terms. That’s doable. And so I think that’s something that you’re seeing happening on an individual basis at the pleb level. And you’re also seeing this at an institutional level. You’re seeing Marathon, Hut, these huge publicly-traded miners, they’re going up to—one of them is a Federal Reserve member bank, Silvergate in California. They actually have access to the Fed window, and Marathon has a $100 million collateralized rolling line of credit with them. And so that’s kind of exciting, right? The big miners—sometimes they’re not the most loved by the plebs because there may be regulatory risks, et cetera, we could go down that path—but the exciting thing is, these huge miners that are mining hundreds of Bitcoin every quarter, they’re 1 exahash, 2 exahash of hashrate. They don’t have to sell. And their margins are so, so large that they want to go buy 10,000 more ASICs. Well, they’re just going to borrow against a little bit of their Bitcoin. And so this has changed the game for a lot of these publicly-traded companies. It’s changed the game for some plebs. Just the amount of services that will allow you to do this in a way that’s optimal for Bitcoiners, in the sense that you understand the counterparty risk. Which is there. It’s always there. If the Bitcoin is not in your own custody, if you don’t have it with your own seed phrase in your own cold storage in your own custody, well, there is some sort of counterparty risk. And that’s kind of hard to quantify at times. But with services like Unchained, it just says, Hey, we’ll put this in a multisig and we’ll leave it transparently in this address, and as long as you pay it down, it’ll stay there. That’s pretty optimal. And so I think hopefully we see more transparency, more services, more options get built out where it’s very easy to just tap into this. You’re seeing this with other chains—you see the rise of DeFi, where there’s these liquidity pools, right? Obviously there’s protocol risk, there’s other risks in these chains like Ethereum when you’re using wrapped Bitcoin. And there’s protocol risks on all these alt-chains, but it’s just a start. And I think you’re going to see a lot of these things that are being built out and built fast and breaking and just trial and error on these other parts of the if you want to call it “crypto ecosystem,” I think that’s all going to slowly be built out on a really sturdy foundation in the Bitcoin world, and I think that’s one of the most exciting things we’ll see over the next decade.

Stephan Livera:

Right. And the existence of these markets, whether they are the likes of Unchained Capital—now, disclosure for my listeners, Unchained Capital are a sponsor of my show, as are Compass Mining—and so this might help people to not have to sell their coins. So I guess that is coming into that purpose of, let’s say, you’re trying to live off your stack. That’s one example. Or you want to participate in this more permissionless finance world. Or maybe another example would be HodlHodl, right? So that’s also another way you can collateralize Bitcoin and borrow stablecoins—as an example, Liquid USDT, USD Tether on Liquid sidechain. So that’s another example. So let’s just talk through the continuity part of it. So let’s say you start that loan and let’s say now it’s been a year or two years—that loan is coming to term. What does it look like? So maybe we could talk through an example just to give people an idea of what does it look like to roll over that loan and sustain this idea? Let me just kind of frame it in one way. So let’s say there’s some big life purchase item that you want, or you want to do Bitcoin mining as an example, or you want to lever up on Bitcoin. The idea is: instead of selling (for example) one Bitcoin today to get that, you’re selling 0.1 Bitcoin in four year’s time, or something like that. That’s an example of how, by using the fiat system, people are able to lower the amount of sats that they are selling, or forgoing, right?

Dylan LeClair:

Yeah. That’s a great point. Everyone needs to have a strategy in terms of how they think about this. What’s the area where they start to think, Hey, maybe I should start to cover some of this principle? Maybe it’s time, depending on what [price] you’re looking at, maybe it’s time to overcollateralize some more. To give an example, say this summer you have a large stack of Bitcoin, you have all of this pristine collateral, and you’re basically living on zero fiat. So Bitcoin goes to $30K, it’s down from $60K. You have a disposable income. You have a salary—we’re talking the average pleb—and you want to stack some more Bitcoin, because it just went to $30K, you’re feeling really bullish—everyone’s bearish. And so you overcollateralize 10% of your stack, say you put 2 Bitcoin in as collateral, you get $30,000 of USD and you buy another Bitcoin. And so now, you have that 2 Bitcoin locked in as collateral, you acquire another one at $30,000, and now as the cycle progresses, Bitcoin starts to appreciate pretty significantly. We’re sitting here at around $60,000. Well if say we get to $100,000-$150,000 in early 2022. Well, now it’s time—I think a lot of people, especially with the euphoria that comes with Bitcoin all-time highs—I mean, when you’re all-in financially, career-wise, and in many senses of the word, a lot of Bitcoiners are very, very passionate, it can get overwhelming in the best way when Bitcoin is ripping. All-time highs, everybody’s talking about it, there’s a huge buzz in the media and in the financial world, and your human monkey brain may say, Lever up more! But really, the prudent thing to do here is—you’ve been stacking sats the whole time—well, when Bitcoin appreciates by 100%, 200%, 500%, whatever you quantify as being, Hey, maybe I should take some risk off, the best thing to do, and it sounds counterintuitive, is to stack some fiat. So instead of continuing to stack 110% of your disposable income into Bitcoin, if Bitcoin appreciates by 500%, since the time you took some collateral out, well it’s a pretty good time to pay down a little bit of that principle. It’s to reduce your overall leverage. Like personally—and I’ve been pretty transparent about this—my strategy over the next decade is essentially, like my bear market strategy, and I’m looking at all this data, my bearish bearish Bitcoin scenario is: I have a hundred percent of my net worth in Bitcoin. And my bullish Bitcoin scenario is I have 105%, 110%—like, I never want to be 2x levered long because Bitcoin goes down 50% and essentially your net worth is zero. And not that I’m going to have all of this in some liquidation engine that can just wipe it all out at once. But I’m pretty comfortable just riding with a stack of Bitcoin and not caring about the exchange rate, and when it becomes optimal to do so, acquiring a little bit of leverage—whether that’s with Bitcoin collateral, whether that’s unsecured in the fiat world—and acquiring a little more of that Bitcoin. And as Bitcoin appreciates—anytime Bitcoin draws down 40%-50%—I think you could call it the Saylor strategy, right? When Bitcoin goes to $150,000, Michael Saylor isn’t going to go borrow another $2 billion to buy. He might start paying down a little bit of that principle though. Or he might start paying down a little bit of that $1 billion he borrowed. And essentially if you’re thinking of that trade in dollar terms, it’s a huge, huge win. He acquired some Bitcoin using fiat debt. The hurdle rate is 5% or 6%. Bitcoin appreciates by 500%, and he starts paying down that principle. And so that’s a brilliant carry trade, and I think that’s how people should start thinking about it. You know, when Bitcoin breaks an all-time high may not be the best time to go lever up, but Bitcoin is going to draw down another 50% at some point—it’s just going to happen. And so that may be the point where from a risk-reward standpoint you take out a collateralized loan with a small portion of your stack with a 25% LTV. Bitcoin has to draw down 75% before you get margin-called and it’s already gone down 50%, and you know you have some more collateral. I’m just throwing out ideas and I’m rambling a little bit here.

Stephan Livera:

Yeah, no, this is good. And I think one point I’d love you to expand a little bit is how people can think about their margin call points, or their liquidation points, because that’s probably something to think about as well. Like it’s prudent to think about, Okay, if I’m taking this loan at $30,000 or whatever amount, how much does it have to go down before I get liquidated based on how much collateral I’m putting in? So as an example, maybe the minimum on the platform might be a 200% or 250% collateral, but you might say, No, I want to be even more safe. I’m going to go for 300% or 400% collateralized. Maybe if you could explain a little bit around how to think about that and basically how to think about your liquidation point?

Dylan LeClair:

Yeah. So if you’re thinking about just overcollateralized Bitcoin lending, because we’re talking about this being a no-loss business for lenders, right? Bitcoin is a very volatile asset. And the financialization of Bitcoin is being able to get credit off of it. This wasn’t always the reality throughout Bitcoin’s history. This is somewhat of a recent phenomenon. The regulatory environment has improved and warmed up to Bitcoin, and more importantly, big money is saying, Hey, this pristine monetary asset—we’re seeing all these derivative exchanges, the shitcoin casinos essentially, Arthur Hayes creating the BitMex perpetual swap and all of these synthetic derivative markets on top of Bitcoin on top of these native crypto assets—and the big money is saying, Hey, we want a portion of the pot. And so now we’re seeing these lending markets emerge. You’re seeing platforms like BlockFi. And I think you’re going to see every commercial bank partnering with NYDIG. I would be very, very surprised if in two or three years—and I’m not going to use them—but if Bank of America doesn’t have a collateralized Bitcoin lending service. And so there’s a bunch of different options. And I think this will be completely variable and up to the consumer in coming years—basically across the board. You’re going to say, Hey, I want to borrow at an 8% rate and they’ll say, Okay, you need to be 2:1 collateralized. So 50% LTV. And so essentially if you give me $2,000 of Bitcoin, I’ll extend to you $1,000 of fiat liquidity, but if Bitcoin draws down 50%, we’re going to have to take that collateral from you, and we’re going to basically margin call you. And so depending on your risk tolerance, depending on where the Bitcoin price is, you may say, Hey, I don’t want that chance of getting margin called with a 50% drawdown. That happened in March 12th, 2020 in four hours or whatever it was on that crazy day. And so, Hey, maybe I want to be 3:1. So 3:1 overcollateralized and be at 33% LTV. And so Bitcoin has to draw down by 66% to get margin called. It can be 4:1, 5:1 overcollateralized. And I think it’s important to understand that even if you’re doing this very overcollateralized, still you shouldn’t do this with a super-majority or all of your stack. You should do this with something where if that margin call is close to happening, you can always overcollateralize further. That’s the really important thing here is: you never want to put yourself in a position to lose everything. You never want to be a forced seller. Like this whole conversation we’re having, the whole thing is: never be a forced seller of your Bitcoin. Because tax purposes, and you don’t want to give up this pristine asset—that’s the whole game here. But if you want to say borrow at a 3:1 LTV or 33% loan-to-value ratio with a 66% drawdown [required to get liquidated], well that’s pretty conservative. So Bitcoin has already drawn down 20%, 30%, 40% from the all-time highs. Doing something like that could be, in a risk-reward sense, pretty attractive. And so that’s how I think about it for the next decade—as long as a fiat exchange rate exists. I tell people, I say, I don’t think the long-term the outlook is very good [for the Dollar], but as a Bitcoin accumulator, I really hope the dollar doesn’t dissolve tomorrow. And it won’t: the Dollar won’t go away tomorrow or next year or even five years from now. And I don’t think it will go away 10 years from now, just because of how long-dated a lot of these liabilities are. But I hope that this BTC/USD exchange rate persists for a long, long, long time, because it’s pretty advantageous for Bitcoin holders and holders of this pristine collateral as long as this funny money Federal Reserve fiat monetary system exists, because all of these interest rates are fake. And so the financialization of Bitcoin in a sense, and the reason that I find it so fascinating—and I follow a lot of the stuff happening in the Bitcoin derivative markets and the Bitcoin futures markets and all of this stuff—is because it’s almost this parallel system, this parallel cost of capital, that’s calling the bluff on the incumbent system and saying, Hey, these interest rates? They’re not real. Like if you want to sell—for instance, Stephan, and this is a little bit of a tangent and a little bit of a side note, but it’s all interrelated I think—in the Bitcoin futures market, similar to gold futures, similar to any other commodity, you can basically promise to deliver Bitcoin in say March of 2022. And I’ll lock in Bitcoin in Escrow, and I can sell you this futures contract. Well, that price isn’t trading at the price it’s trading at today. It’s trading at say, $60,000 or $61,000. And so there’s a 10% or 15%, annualized premium on that Bitcoin. So in the Bitcoin markets, in the crypto markets more broadly, the cost of capital isn’t 0%. It’s not 1% or 2%. It’s not 3%. Depending—and it’s very variable, and it’s very variable depending on sentiment, depending on leverage—but most of the time this cost of capital, this risk-free rate, like I can just capture this Delta-neutral, market-neutral in these futures markets, it’s like 10%, 15%, 20%. And so here you have billions and billions and billions of dollars in these futures markets, in these derivative markets, in these lending markets, all of these things—whenever you see a stablecoin with an 8% yield offered on some of the exchanges, and they’re saying, how are they coming up with these rates? And they’re saying, That’s definitely a Ponzi. How are these exchanges doing it?—well, it’s because the cost of capital in these crypto markets and these Bitcoin markets, again with billions of dollars of liquid trading every single day, that annualized cost of capital is like 15%, 20%. And so that’s where it’s really interesting and [why] that that arbitrage exists is because the people in these markets understand that the fiat rate is not real, right? So that’s where this is really exciting, and this arbitrage exists as these worlds converge and collide. It’s that the fiat world and the commercial banks, everybody that’s going to enter this space that is going to offer Bitcoin collateralized products and all of this over the next 1 year, 5 years, 10 years—they’re still operating on a USD standard. And there’s people like us that are saying, No, it’s a Bitcoin standard, and if you’re offering me a 5% annualized rate to borrow money, I’m going to take that all day. And I’m going to do it in a more risk-responsible way, but we can use that to our advantage.

Stephan Livera:

Right. Yeah. I think you put it really well there. And so we can take an educated guess or speculate a little bit about the kinds of products that will become available over the next few years. So for example, and this is probably not a big novel idea when people are in the Bitcoin community are saying this: this idea of having a credit card that you could collateralize with Bitcoin. And you could borrow and use that for your day-to-day, paying your expenses. So that way you’re not spending sats. And so it helps people essentially attack the fiat system, taking loans every time they’re spending on their credit card and just having some Bitcoin as collateral and just relying on that. Or another idea might be the idea of having a home loan product that you can collateralize, again, with Bitcoin. So I think these are some of the ideas and directions that we will see. And as you rightly said, some of the big banks, they might start—so as an example, even in Australia, the Commonwealth bank of Australia, the biggest bank in Australia, recently came out saying you can buy Bitcoin inside the app. It would only be natural for them to in a few years, who knows, take that next step and say, Hey, we’ll let you collateralize that, because now you’re going to be paying us interest. So everyone’s getting their own little piece of the pie here because the banks are getting interest revenue—you and I, the HODLers, are able to keep HODLing, right? So basically these products help us keep HODLing. That’s an interesting way to summarize it, perhaps.

Dylan LeClair:

Exactly. And a lot of these banks—the legacy incumbents, the guys that have trashed on Bitcoin for the last decade—it’s not that they, it’s not that they want to eventually see their business get destroyed because Bitcoin obsoletes them, it’s that it’s a no-brainer, and competitively and in a game-theoretic way they have to enter these markets. Because again, they’re lending money and their risk-free rate is set at 0% and inflation is running hot and they’re lending out rates to personal loans or corporate borrowers at 3%, 5%. Then on the other side they see people are borrowing against their Bitcoin completely overcollateralized. So to highlight again: for lenders, it’s a no-loss business. Yes. There is some execution risk, maybe—depending—some liquidity risk when Bitcoin has these huge liquidation events like we’ve seen in the past, but really, if you’re doing it right, it’s a no-loss business for lenders. And so they’re saying, Oh my God, it’s a no-loss business, and they’re still getting this attractive interest rate? Well, it’s a no-brainer. And so that’s why they’re all coming, right? It’s not like they want to just obsolete themselves. They’re seeing others do it, and there’s a huge, huge demand for doing this with this newly-found trillion-dollar asset class. Like there’s an immense amount of wealth from Bitcoin holders, and these Bitcoiners don’t really have an interest in selling, right? If you have a large stack of Bitcoin today, you have gone through a lot to get to this point, and now with Bitcoin at $60,000 and the legacy system looking as shaky as ever, you’re going to say, Yeah, I’ll just sell all of my Bitcoin, or, I’m going to sell a large part of my Bitcoin? No, that’s not what’s going to happen. You understand the endgame here. So that’s where this is really exciting is because—and to highlight again, to go back to that Speculative Attack article, the thing that people don’t really understand is that when dollars are lent, when a loan is extended, fiat money is created—so you have this absolutely scarce monetary asset, Bitcoin, 21 million, against this fiat monetary system that with every dollar that’s lent out the money supply expands. If I’m a lender, if I’m a commercial bank, I fractionally lend out my reserves. Now I have an asset plus this interest payment that I’m expecting—you have a liability and you have the dollars in your hand. That just created money. And so this speculative attack, whether it’s me going out there and getting a 0% credit card for 12 months and just spending it on my grocery bill and stacking sats with the difference, or it’s Michael Saylor executing this on a billion-dollar scale, we’re actually introducing more fiat units into the system while hoarding the Bitcoin supply to ourselves. And so this actually exacerbates the process of hyperbitcoinization, and it’s this feedback loop that basically guarantees the demise of fiat, which is kind of big-brain idea, but it’s pretty exciting to see it play out across the world. It’s pretty fascinating.

Stephan Livera:

Right. Yeah. And so it’s also fair to say that this principle or idea existed even just in the fiat world with people borrowing to do property purchases or stock purchases or other ways where they’re levering up. But I guess the difference here is Bitcoin is actually a viable new monetary standard, whereas property and stocks could not become money. They’re not marketable or saleable in the way that Bitcoin is. So that’s an interesting aspect there. Now I don’t want to be too much of a Negative Nancy, but I think it is fair to point out some of the risks for people, right? I think listeners of my show are intelligent, but just to make it clear for everybody that there are risks, and this is not a free lunch, right? You are paying interest. That’s one thing. You’re paying an interest revenue for the loan, obviously. There is a liquidation risk as we’ve spoken about, right? So Bitcoin has gone through multiple 80% drawdowns, and there’s no guarantees that it won’t happen again. And it can happen very quickly. So at that time in the March 2020 example, it can happen very quickly and you might not have that time to get your collateral in. So as an example, instead of getting liquidated, If you have the option to post more collateral, to post some more Bitcoin, but guess what? During the price drop, miners have an incentive to—well basically, the blocks slow down because the price is lower, miners have less of an incentive, and then fee rates go up. So now you’re actually trying to get your Bitcoin into the collateral at the precise worst possible time. So that’s an example there. Also: not your keys, not your coins. So that’s always something people have to think about too, because if you’re using a provider and you do not have a quorum of keys, even if you hold one out of three keys, or you hold zero keys, that is a risk that some Bitcoin people may think, You know what, that’s just more risk than I’m willing to take. And I think it’s fair for us to give a balanced presentation. Now I think obviously there are some great benefits here and I believe in that product, but I also want to be clear: here are some of the risks out there. So anything else you wanted to add there around the risks?

Dylan LeClair:

No, I think you nailed it. Obviously there’s custodial risk, there’s liquidation risk, BTC/USD exchange risk. I think one of the things with the fiat monetary system is: the stuff that we saw last year in March of 2020, this kind of hyper-deflationary events, these risk-offs across every asset class—equities, Bitcoin, real estate—we saw the treasury market in March of 2020 go illiquid, no bid. This sort of stuff is a result of a hyper amount of leverage in the incumbent system, and that is going to continue at various points, unwind in these huge cascades, and they’re going to have to reinflate the system. So if you’re subject to this exchange rate risk during those periods and you’re already levered up with all of your stack already levered up to the head because you think Bitcoin’s going to the moon—which it will eventually—but you’re putting yourself in a huge risk there, again, to become a forced seller, which is the last thing you want. So all of these things, if you want to even consider it—optimally, you don’t want to do it with a large portion of your stack. Conservatively, like I say 5% maybe, maybe. And so if you don’t have a large amount of Bitcoin, some of these strategies aren’t really all that worth it. It’s not just like borrow $100 Bitcoin. You can do it, maybe. But some of this stuff is just—you want to have a nice little stack to execute these things and really have it be viable. And really, optimally, anytime you enter one of these things, I mean optimally, Bitcoin has already drawn down 50%, right? That risk has already been taken off the table a little bit. There still is obviously more downside—there’s no free lunch like you highlighted—but doing this at all-time highs when everyone’s euphoric and Bitcoin has already gone up by 400% in a year is maybe not the best time. And I would just say: maybe be prudent and continue to stack some sats because, again, there is no liquidation risk with Bitcoin in your cold storage. There is no counterparty risk. So that’s the important thing to continue to reiterate, as we’ve talked about multiple times. Just to continue to hammer that point home.

Stephan Livera:

There’s one more risk, actually. I’m just thinking of it now: let’s say you take out a loan—you still need to be able to make interest payments on that. So as an example, if you lost your job, that could also be a problem for you too. So you should also be thinking about that too. So let’s say you enter into a three-year loan, you borrow some Bitcoin and you’re trying to do this strategy. If you lost your job as an example, like you’re working in some other sector or whatever sector—or even in the Bitcoin sector, whatever—if you lost your job, then your ability to repay that loan now is at serious jeopardy, or is now jeopardized. And so that’s something to also think about. So that’s also another reason for people out there to be conservative in how they do this, or think about these things. Although you might be able to find ways around it—like, let’s say if the number goes up enough, well, okay—maybe you might be able to still make it work, but it’s just something to think about also.

Dylan LeClair:

100%. Great point.

Stephan Livera:

Yeah. Okay, so I think these are all really good points. I think it’s been a very illuminating discussion. One other area I wanted to touch on with you is just where we’re going with this. Now we’ve spoken about this idea that it’s foreboding the eventual crash of fiat, right? And I mean, it’s a global world out there—probably 45% of my listeners are in the US—but hey, there’s a lot of people out there all around the world who might be doing this in their local currency. But I’m curious what happens, because as an example, it could be that eventually credit freezes up. So it’s like people want a loan, but actually the fiat banks can’t offer that credit anymore. So I’m curious what you think? Whether that is a scenario that could happen or a likely one, and how would you deal with it in that scenario? So let’s say you’ve done this Bitcoin loan and you’re trying to roll it over, but now credit is freezing up. And so now you’re stuck, right?

Dylan LeClair:

I think it’s really interesting, this convergence between the central bank fiat monetary system and this emergence of the financialization of Bitcoin and more broadly, crypto markets—and I say that and a lot of people will cringe—but you’re seeing this rise of peer-to-peer lending, stablecoins are exploding, all of this stuff. Again, I’m not going to hold a significant portion of my net worth in stablecoins because essentially it’s a commercial bank IOU wrapped onto a blockchain IOU which can be frozen at any point. But what you’re seeing—with all of that aside—is that you’re seeing a lot of these markets emerge at large scale. The total stablecoin market value I think has well-surpassed $100 billion. USDC and Tether alone have surpassed $100 billion. And you’re seeing a lot of other sorts of stablecoin protocols and all of this stuff that’s not Bitcoin, but you’re seeing these lending markets, these peer-to-peer markets emerge, whether that’s on centralized exchanges—again these protocols in the altcoin sphere, there’s a lot of risk there—but you’re seeing these markets emerge. And the free market, right? So whether it’s on FTX, peer-to-peer, where you can take your USD liquidity, your BTC liquidity, and in a peer-to-peer fashion, in an overcollateralized fashion, lend it out to people who want margin. And so there’s all of these things that are arising that you have this kind of natural rate of interest. Also, you have—like we talked about earlier—you have this Bitcoin futures market. And so in times where Bitcoin is a really, really big bull market, you’re seeing the demand to be long Bitcoin is really, really high. So in a completely market-neutral way, you can be just short futures, long spot Bitcoin, so basically what that means is you have your Bitcoin—that’s your long spot—and you sell it in a futures contract. You basically lock it in and say, I’ll promise to sell this. And a counterparty does this for you, again—so there is counterparty risk. But you can capture, say, 40% yields, 50% yields. And essentially I think of this as an interest rate. You have, say, the Bitcoin perpetual swap, which is: there’s a BTC a spot price which is traded around the world. There’s a spot index. The perpetual swap is a derivatives contract where there’s long and shorts and there’s an equal amount of longs and shorts on every derivatives exchange—every buyer needs a seller—but there is a perp price. And so if those longs or shorts on the derivative exchange want to bid up the price of Bitcoin against the spot index, well there’s a funding rate. So if, say, the price of Bitcoin is $60,000 today, and the perpetual swaps price is $61,000, but what you’re going to see is that longs have to pay shorts an immense amount of funding—basically a notional percent of their position size—every eight hours or so. So that in itself is a market interest rate if you want to think of it that way. In the legacy world, basically we have a treasury and you have a coupon. Well in these Bitcoin markets, we have the BTC/USD exchange rate and the futures curve is almost this interest rate. And so I think the interesting dichotomy is: the central banks, the governments around the world, if they stopped printing money, then everything is going to collapse. And BTC, everything else, will see huge corrections in their dollar-denominated price. But we know that with the Bitcoin protocol, proof of work mining, the difficulty adjustment, there will be basically a production cost of Bitcoin. So there is value that we know will be maintained. But regardless, they have to print. If they don’t print, everything collapses, but we’ll still have these native markets for this cost of capital. And so it’s almost like a check on these central banks and governments, and the moment they start to print again, we’ll see the exchange rate for Bitcoin and for equities and everything else rip again, and all of these lending markets will be once again flush with liquidity. And you’ll see this in action. In March, when everything crashed and literally there was no credit available until the Fed and everyone else stepped in, well in the crypto markets, actually, the lending rates were basically zero or negative in the sense that they were paying you to go long Bitcoin. Everybody across the board was wiped out, and essentially you could go long Bitcoin on say a perpetual swaps, or all of the stablecoin yields—it’s like at zero! The cost of capital in these crypto markets is at zero. So I don’t know necessarily what’s going to happen, but what I do know when I’m saying all of this is that there is a check on the centralized commercial bank, fractional reserve credit extension that we’ve seen in the past. And it’s these free and open wild wild west—and let me just be clear: it is the wild west in what’s happening—billions of dollars every second of the day are being thrown around, being borrowed, being lent out, being overcollateralized. It’s really fascinating to watch, but there is kind of this parallel system being built out. So what will emerge? Will there be a Bitcoin-native DeFi liquidity pool that’s a secure protocol in the future? I mean, I hope so. And I’m really excited to see what’s built. But I do know that it’s really exciting and there is this kind of native cost of capital in Bitcoin that is variable, but that is completely out of the realm of central bank, monetary systems.

Stephan Livera:

Yeah. It’s really fascinating to think about. And I can tell you’ve obviously put a lot of time into researching and thinking about this. And even for me, it occupies a lot of my time as well. I’m thinking about, Okay, it’s essentially using the fiat system against itself in like this crazy judo move where Bitcoin HODLers are essentially using the system against itself so that they can keep on stacking, or they can keep on Bitcoin mining, or they can live off their stack without spending their sats. And so it’s just a really crazy interaction of all these different fields in terms of accounting, tax, economics, finance, global macro, maybe throw in a little bit of on-chain analytics and looking at what the exchange derivative rates are and looking at what the fiat bank funding rates are. It’s just this crazy mishmash of fields. And I think it’s intellectually very stimulating to think about. So, very interesting stuff for me! But I think it’s probably about time to wrap up here. We normally keep it about an hour on my show. So Dylan, where can people find you online? And tell people where they can find The Deep Dive also?

Dylan LeClair:

Yeah. So you can just find me on Twitter. I spend a lot of time there just interacting with everybody and throwing around a lot of these ideas. Like I said, in the introduction, I’m working on The Deep Dive with Bitcoin Magazine. So we cover a lot of the on-chain stuff, derivative stuff. And again, it’s kind of outlined with this macro thesis, this hyperbitcoinization thesis, that it’s the best money the world has ever seen. And we’ve talked about all this kind of extravagant lending ideas and borrowing ideas today, but just to make it clear—and in The Deep Dive I say this probably every day—we’re not giving trading signals, that’s the first thing. But the second thing is that you can’t lose by just stacking stats and having a low time preference and just riding the wave and just—stay humble, stack sats, shout-out Matt Odell—a lot of this stuff. It’s interesting to think about and to execute is exciting. And there is some risks there, and if you make it out then you’ve basically outperformed Bitcoin, which is very hard. But you can’t lose with just hanging back and doing what we all know is the best. Stephan, I really appreciate you having me on. This is a really fun, wide-ranging topic on a lot of stuff that I don’t cover too often on podcasts. So it was a nice change of pace. And I’m looking forward to getting this one and listening to it.

Stephan Livera:

Fantastic. Dylan, well thank you for joining me. I really enjoyed chatting with you.

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