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Crypto Lending

ASK BART: Should I Borrow Against Cryptocurrency?

What could go wrong?

- By The Notorious CFP®

Yes, this is an actual question that I actually did get up until fairly recently. In all fairness, 99% of my clients would be challenged even today to explain what cryptocurrency is and 90% wouldn't touch it with a ten-foot pole. We're honestly just not that sophisticated out here in the sticks. But I work with a lot of families and I am blessed to work with more than a few young investors, who tend to be both very knowledgeable and very interested in crypto. Young people- who I often deride in general as a age demographic, culture and political voting block- are composed of some of the smartest and best people I know, hands down. But if they are honest, most will admit that their peers are ... er, challenged. (I would use other words.)

The short answer, of course, is no. Most Americans should strive to never borrow on anything, especially a speculative Ponzi scheme like the vast majority of crypto. (I prefer not to suffix "currency" since nothing so volatile could ever be reliably used as a currency (i.e. a valid means of exchange.)

I recognize that offends a lot of people and I'm okay with that. Every single financial problem in life, without exception - be it national, municipal, corporate or personal - is the direct result of leverage and debt, which are fundamentally slavery and a pledge of future earnings. If anyone thinks that a pathway to financial independence and wealth, please come visit me. The only reasonable type of debt for the average citizen in a capitalistic economy is borrowing on assets with a long-term and consistent history of appreciation that either a.) generate immediate, reliable and fixed income... or b.) put a roof over your head. I'm fairly indifferent towards that one time you or someone you knew borrowed money and it worked out, or at least didn't destroy you financially. If even the geniuses at SNL think it's dumb, then you know it's bad.

But since it's one of my post, I shall also explain why through a religious context (seriously!!)

Is God Dead?

It's well-known and understood that the United States- along with the majority of the western world- has been gradually retreating further and further away from organized religion for several generations. Recent polls by Gallup have shed new light on the changing nature of American's relationship with church, religion and God. And the fall, especially since the Great Financial Crisis (GFC) of 2008-2009, has been stark.

With the growing size and influence of the mostly terribly raised, absentee-parented, agnostic, GenX/ Millennial/ Zoomer generations, the trend toward a godless society and undiagnosed 'Dark Triad' sociopathy-as-a-generational-curse has accelerated, now it's a feature instead of a bug (as in all previous American generations). But it is one that goes back several generations and emanated primarily out of the social revolution of the 1960's (and in turn, the way those impressionable young Baby Boomers eventually raised their children). In retrospect, perhaps it was inevitable once we elected a Catholic President and the NFL allowed Joe Namath to wear his hair long like a hippie. This temporal tide eventually turned into a tsunami (see what I did there?) made most famous by Time Magazine's iconic April 1966 article..

It was a remarkably  blunt question for the time, quite fitting for the topic at hand. Some believe the d/evolution of formal religion was by design, and judging by current events it's an easy argument to make. (The better question being, "who's design?" i.e. qui bono?) Others see this shift as simply the fate of all maturing and declining empires. Quite a few people feel the destruction of religion's influence on the West was-  and still is- an idea who's time had come. The benefits of increased secularism have enjoyed intense debate going back as far as religion itself and the phrase is largely attributed to German philosopher Friedrich Nietzsche as early as his 1882 collection The Gay Science.

"God is dead. God remains dead. And we have killed him. How shall we comfort ourselves, the murderers of all murderers? What was holiest and mightiest of all that the world has yet owned has bled to death under our knives: who will wipe this blood off us? What water is there for us to clean ourselves? What festivals of atonement, what sacred games shall we have to invent? Is not the greatness of this deed too great for us? Must we ourselves not become gods simply to appear worthy of it?" - Friedrich Nietzsche Thus Spoke Zarathustra

Not surprising, as the country has become less white, younger and more liberal in the last forty years, we see Americans becoming less Christian, less religious and attending less far church. As mentioned in previous articles, Generation X tends to track pretty close with the Baby Boomers in all major metrics (so much so that they are largely ignored), but a deep and seismic divide has formed in regards to the nexus of religion and politics between those two older generations and the two newest, the Millennials and Zoomers. 

There are many viable reasons for this division (and at least as many theories), but it seems most likely that the Boomers and Gen Xers can still reference their personal experience with the more socialist (and more economically problematic) 1960-70s, while the younger generations are more aptly defined by their upbringing in an unprecedented era of virtually uninterrupted prosperity in the last forty years, since roughly 1980 (i.e. what is often termed "affluenza.")

In fact, one could even make a broad generalization that religion and belief in God correlates (and predicts) political ideology more closely than any other metric currently tracked. Said differently, if you're politically conservative, you are almost certainly more religiously-inclined. However, if you tend to lean more liberal, the connection is certainly less certain but still provides hints.

The groups with the largest declines are also the groups that are currently least likely to believe in God, including liberals (62%), young adults (68%) and Democrats (72%). Belief in God is highest among political conservatives (94%) and Republicans (92%), reflecting that religiosity is a major determinant of political divisions in the U.S. - Gallup Survey, Belief in God in U.S. Dips to 81%, a New Low.

Some folks approve and some condone of the retreat of religion (as distinct from spirituality) in our lives, while others seem simply okay with it. But I suspect few ever even contemplate the removal of one of the three core historical pillars of our society (along with government and corporations) or the ramifications for all of us. What does seem certain is that all humans have a deep and abiding need to believe in something, it's built into our neurologyIndeed, when you remove one fundamental and persistent belief system, it invariably must be replaced with another. 

For many Americans today, it's easy to observe that their religion is the state, and our leaders are their gods. (So much as they do not see themselves as gods, as Nietzsche stated above.) Of course, few would employ such euphemisms nor would many articulate their perceptions as such, that our leaders are divine. But actions speak louder than words. How many brazen falsehoods, hoaxes and lies have we consumed in the last 3-4 years by our leaders, through mediums, on subjects and with a conviction that would have surprised and horrified our ancestors? Today, it feels like few of us  even blink when Presidents Trump and Biden just manufacture absurd fantasies in their heads and speak them aloud, completely unencumbered by truth? How are Adam Schiff and Margorie Taylor Green  still employed? Why are Dave Chappelle and Ricky Gervais cancelled for speaking facts?

I could easily list plenty of examples of the type of deification I'm referencing but you already know who I am referring to. I personally believe that any elected (or unelected) national figure whom we do not collectively regard with at least a modicum of suspicion and skepticism is in effect serving in a god-like role. Many will find that cynical and cold. But in my experience, these folks also forget our country's founding principles and frankly all of human history. Sadly, I suspect most people display a heightened degree of mistrust towards any  political leader that they disagree with, but remain challenged to do the same towards those they support. Hence one of our most significant flaws as humans, as this contradiction is illogical, dangerous and wholly incongruent with reality. Anyone who cannot properly criticize their own preferred politicians is in my estimation weak, not particularly intelligent and hardly to be trusted. Like those who cannot engage in self-effacing humor, for instance.

I introduce these seemingly disparate foundational ideals because secular deification is problematic for myriad  reasons, but I will refrain from a deep dive into why because a.) I doth protest too much  already, perhaps you noticed... and b.) if you don't know the current leaders that I'm specifically referring to, this probably isn't the blog/topic for you. The truth is that it's not unusual for modern and ancient humans to routinely elevate individuals on a pedestal that don't deserve it. And we seem to have perfected it in in the last several years. In more logical, rational eras (as recently as the last century), many of the people I'm thinking of (but dare not speak of) would have already been incarcerated, or worse. Unfortunately, those are not the times we currently inhabit. Thus the deception and chaos continue and expand in amplitude and audacity. 

So what exactly does any of this have to do with crypto lending again???

Mostly, I just like making fun of young people and statists. But that's not the only reason... I'm getting there, I promise.

In between the two prevailing domestic political ideologies of the republic, there is a virtual hodgepodge of different secular "denominations." We have our center-left and center-right, or moderates, but further out on the fringes we also harbor loud but largely fringe degenerates on both ends of the spectrum (leftists and far-right). You know the type, they're in your Facebook feed and post more than the threshold of once annually that separate the normal people from the damaged, lonely weirdos that consider the internet reality. There also exists a fairly large (and growing) tent containing independents, disenfranchised conservatives, anarchists and those with similar (though less subversive or violent) tendencies. In my job, I have seen an increase in a new cohort of client  with absolutely zero political affiliation with the so-called "uniparty" as well as similar disengagement in any type of religion.

Within that particular sect, there exists an interesting new  variety of crypto enthusiasts. Specifically, they gravitate towards a quasi-religion of cryptocurrency and I believe that their existence and mindset may be one of the primary reasons that our financial markets are currently depressed, and also threatening to take down the rest of the market with them. So-called "Crypto Bros" are so fanatical about their cause that up until recently they faced an enormous and seemingly existential dilemma: how to spend their obscene profits from the rapid appreciation in their crypto wealth, without having to actually surrender any of their underlying currency (a token). In essence, they want to spend their "money" without having to sell it.

Yeah, don't we all. But for them, their quandary is different. For example, no one thinks the US $100 bill is going to be worth anything more than $100 for the rest of their life. In fact, most understand and lament that our currency is losing 12-15% per annum right now. But for cryptocurrency true believers; they are absolutely, positively, 100% certain their tokens are will appreciate to $100,000 in value, most on the way to $1M. As you can imagine, the fall of most major cryptocurrency from grace in the last year has been jarring to say the least. Most of us are suffering through a hyper-inflationary dollar, but for crypto fans, it's an existential cognitive dissonance resembling madness.

But it gets worse. Much, much worse.

Crypto Lending

Last week, I watched the classic, Pursuit of Happyness (sic), the absolute [8.0 IMDB] classic that was just added to Netflix. If you haven't watched it, a.) stop reading this trash and download it now, and b.) it really is a remarkable movie based on a book of an aspiring stock broker (played by Will Smith) who suffers incredible trials and tribulations as he pursues his dreams on Wall Street in the early 1980's. One of the many remarkable aspects of the story is his loss of shelter as he struggles to survive a competitive but unpaid internship at Dean Witter in their San Francisco office. His hero's journey becomes so precarious that he is evicted (twice, once from his apartment then from a sleazy motel) before being forced to sleep in both a homeless shelter and even a train station bathroom (the BART - Bay Area Rapid Transit, but that's irrelevant to the story, obviously.)

The contrast between his lack of options then and ours now is truly striking. Someone watching the movie today - only sixteen years later- would be tempted to wonder, "Wow, couldn't he just borrow the money? Or put it all on a credit card? Or ask the city to put him up in a fancy apartment?"

Of course, we all know the answer to that. Credit cards (of the bank variety) didn't even exist until the late 50s, with Bank of America in California (shocking, who could have seen that marriage). Suffice to stay that widespread adoption of credit cards nationally was still in its infancy through the 1980's. This is the point when many of my Boomer readers will hopefully jump in with some fantastic stories to regale me and anyone else born in or after these dark ages with stories of frugality and past abhorrence with the concept of "buy now, pay later."

While attending UT- Austin (or "Sodom on the Colorado") in the 90's, I distinctly remember "earning" my first credit card (and a free shirt) on the sly my senior year. It was a VISA with a $200 max and I genuinely thought I was rich! The university itself gave me a similar size cash loan that they literally billed to my tuition. To this day I have no idea how/why and shutter to think what they're doing to their students now. 

Man, how things have changed. The 21st century ushered in the age of financialization and it's here we arrive at the point of this insanely disjointed post: debt's newest incarnation is represented by a burgeoning industry of lenders for cryptocurrency captained by colorful entrepreneurs that has stepped in to solve this problem. Today, cryptocurrency investors enjoy the ability to borrow against the increased valuations on their 'collateral' to fuel highly-conspicuous consumption- including cars, boats, homes and all manner of luxury items. Forgive me if you've seen this movie before...

What do you think these new-wealth crypto millionaires will do when their collateral is cut by more than half? I fear that they might start selling real investments

This economic cycle, consumer debt falls under sophisticated-sounding Decentralized finance (DeFi) lending, a platform that is not centrally governed but rather offers lending and borrowing services that are managed by smart contracts. With a cool name like DeFi and stitched together by "smart" contracts, what could go wrong.. right?

A lot. Like what happens when a currency like Bitcoin is used to finance a Bugatti car at 12% but then proceeds to lose 2/3 of it's value in less than a year?

It's called repossession. 

I bring up this topic because this leveraging of an investment to fuel spending, and the aftermath of a massive cascading series of defaults, is a big hocking deal that few are talking about. These lending groups are now failing on a weekly basis. Our legacy media is is only now starting to connect this trend to the decline in the crypto market and it's adverse impact on financial markets. Which is surprising to me because all recessions are fundamentally caused by too much debt somewhere in the system- every single one. And the forced liquidation of an asset (and I use the term very loosely) while currently in freefall in order to cover margin calls is a fascinating topic as well as a classic ingredient in all economic recessions and market corrections of the past. Not to mention that "crypto bros" going broke covering their hyper-consumptive lifestyle finances by loans seems like an intoxicating story in its own right, one that practically writes itself

I won't go deep into this particular disaster here, saving this topic for another day. It's enough to simply suggest that:

  1. Borrowing money against any fake, intangible asset that fluctuates by more than 50% in mere months is a really bad idea. And why market legend, Charlie Munger, refers to crypto as a venereal disease. (His words, not mine!) 
  2. Anyone or anything selling something called "open source liquidity protocol" should generally be avoided by anyone who likes keeping their money.
  3. If anything below from lending leader Aave gives you the heebie-jeebies, then you're in good company.


When future articles and books are written about this current economic era, entire chapters will be devoted to how the rise and fall (and probably subsequent rise and fall..) or this digital [wealth/currency/gold/real estate] helped cast an even larger albatross onto the longest bull market rally in history (2009-2022.) In that spirit, I ask you to consider whether selling your investments in real companies that make real products in real buildings and pay real dividends in such an environment is smart. If one believes in the proposition that a new generation of speculators has been sucked in and exploited by our newest gold rush, is it reasonable to recognize that crypto lending is yet another classic excess (albeit similar to so many others of the past) that simply needs to be flushed out of the system for us to move forward with an improved, healthier and more legitimate economic and market system? Would it therefore seem to be an equally coherent argument to simply ignore the carnage in the areas of excess (hopefully by now you can perceive lending on crypto as excessive), go on with one's life and let "the hogs be slaughtered," to lay the groundwork for future economic growth?   

Kids, this is not a good deal, and the interest rate is only where the fleecing begins...

One of the cardinal rules of investing is if it sounds too good to be true, it probably is. This rule dovetails well with a second maxim, the times when people are most desperate for profit/yield are the most fertile ground with shysters. The third one is basically my own, but I probably plagiarized from your grandmother, when she told you, "Never borrow OR lend your cryptocurrency."

My advice is to just get a job. Like they did back in the day.

Most wealth in this country is earned through labor, and preserved through investments (securities, income-generating real estate, etc.) Certainly Perhaps I'm too simple and too hick, and call me crazy, but I don't know a single person in my 21-year career in financial services who has built their core wealth sitting on their butt and/or trading shares/ tokens/ contracts. While the quality of actual labor across the spectrum will always be debatable (for instance, a teacher vs. a linesmen vs. a banker..), the vast majority of financial success in life begins with income earned through labor. Not through speculation. Anyone tempting Murphy's Law by a.) moving their earned wealth... into b.) "digital gold..." and then c.) pledging it as collateral... for d.) pledging future income (also known as debt)... for e.) conspicuous consumption... is asking for trouble.