 You've probably heard of terms like short squeeze and long squeeze and margin call, and for many people these are esoteric terms used by traders. But there come some moments in the market where we all get the clarity of personal experience to remind us that these terms mean something very, very down to earth, very practical. Right now, we're in a long squeeze. What does that mean? That means that if you've taken a position where you hold a lot of Bitcoin and the price goes down rapidly, you run out of money to pay your electricity bill or your rent. Basically, your landlord is putting a margin call and you are feeling the long squeeze. That's what we'll talk about in this episode of Speaking of Bitcoin. I'm Andreas Amantanopoulos, and on this episode, I'm joined by the other co-host, Adam B. Levine, Jonathan Mohan, and Dr. Stephanie Murphy. Hi. So, one of us here has actually experienced the margin call, but I'm certainly getting a lot of emails and messages from people saying, I'm under pressure. Price has gone down. I've run out of cash, cash meaning US dollar or fiat, and I've got to pay bills. What can I do other than be forced to sell my Bitcoin at a time when the market prices down and it's going to really hurt to sell my Bitcoin? We also got some listener messages that kind of relate to this topic. One person was asking us, they said they're currently looking for a new house to buy. Could you talk about the current situation, inflation and store value alternatives? Why it might be a good or bad decision to get a mortgage loan of around 500,000 euros right now? Obviously, we can't advise your personal situation, but I assume they're talking about this in relation to crypto because this person probably has crypto and they're wondering, okay, should they sell it when it's down? Should they take out a collateralized loan? We just found out that crypto-backed mortgages are now a thing, and there certainly has been, for a while, a lot of these products that let people put up cryptocurrency as collateral to back the loan. Without a credit check, without looking at your credit history, all they care about is if you have the collateral. If you can put up the collateral, they will lend you money and then you can pay it back. If you can't pay it back or if the value of the collateral drops, they're going to liquidate your collateral or you have to come up with the money to pay it back so they don't liquidate it. These collateralized loans, basically, you want to get cash. You don't want to sell your Bitcoin or your cryptocurrency otherwise, and by taking out a loan, in theory at least, you avoid a bunch of taxes that you would have to pay. Yeah, there's many reasons people might not want to sell their crypto. One is that it's cool and you want to hodl. You believe in hodling and you believe that it's going to go up in the future and it's good to just never sell it, right? It's kind of like the best way to lose weight is never to gain it in the first place or maybe the opposite of that, but the best way to hodl Bitcoin is never to sell it in the first place. But that's a counterproductive strategy because we've talked about this on this show, which is the idea that actually the best way to hodl is to have a little cushion of fiat that you can spend to weather a down market so that you don't have to sell the worst possible time. Now, collateralized loans didn't always exist. Even if they do exist now, not all of them are good. Not all of them may give you the terms you want, and some of them have some unanticipated risks. Maybe, maybe the best strategy to hodl is to settle a bit at the top, take some profits and have a cushion of fiat. The best way to hodl is to settle a little. So these collateralized loan products wind up getting popular every time you see kind of one of these bull market runs. And what happens is that people are like, wow, I have a lot of money, but it's actually just still stuck in Bitcoin and I don't want to sell my Bitcoin in order to get at that money. So you use your Bitcoin as collateral and then you get money, you pay, I don't know what interest rates are, maybe 7%, 9% somewhere in kind of that range. So it's definitely not nothing, but compared to paying 20% capital gains or something like that. Or 20% on a credit card, APR. Well, yeah, of course. So it's not a terrible option from like a kind of baseline perspective. But the challenge is that people take these loans typically when the price of a currency is going up. And so that means that if you think that the price of the currency is going to go up, well, you can't figure out when to take profits against this thing. And I see many people who just ideologically decide that I'm not going to take profits. I'm going to use this as the vehicle. Now, that actually is an okay strategy. So long as you have sufficient collateral, which is to say, so long as you are borrowing money that you already have in larger proportions held in whatever you're providing as collateral. And so when markets turn around, as we've seen in the last two months, I mean, that's where that math that really helps you going up that seems like, wow, this is a great value going up turns into, wow, this is incredibly painful. I wonder when Bitcoin or whatever is going to stop falling in value. Like what can I do about this? Because it goes from being a thing that allows you to get liquidity without sacrificing any of your potential upside exposure, to now you need to repay that liquidity. You need to put that money back into the system, but you have to do it at the worst possible time. Well, and you thought the previous time was the worst possible time, but guess what? It's now worse. The gift that keeps on giving. The funny thing to me is that this is not a new thing. In fact, what we're doing here is reinventing the wheel, if you like, or re-envisioning something that's been done for many years. If you go and watch finance advisors and secrets of the rich and famous and all of that, you'll see that one of the key ways the rich people avoid paying taxes and get to live is not by generating income, but basically using their stock, their securities as security to a loan and borrowing against their stock portfolios and then paying interest on that loan and deduct big chunks of that interest depending on how they do that loan exactly and basically don't pay taxes, of course, on any of that. So this is the same trick. The only difference is we're now doing it with, I don't know, 10 times the volatility and excitement and a lot more risk. I think that there are perfectly good reasons why people do this. And I think that from an instinctual, how do we feel as emotional market participants, it definitely does make sense. In some situations, it can be a really great decision. Well, it's great for people who don't have access to traditional credit. Just speaking for my personal situation, I'm self-employed and trying to get a mortgage is difficult when you're self-employed and that could be a good option for someone like me or someone who is maybe retired or living on investments or something like that. It's like, if you have the collateral, you could get a loan and no questions asked, almost. It doesn't matter about your credit history or whatever. Yeah. And it's funny because in the past, you couldn't use Bitcoin or anything else as collateral that wasn't a traditional financial instrument. And I've experienced that myself trying to refinance a mortgage at a time when I had enough Bitcoin to basically buy the house cash. It was a good year. And a cheap house. Let's put it in context. And they wouldn't approve me. They were like, you have insufficient income because, look, your business has a bunch of deductions and doesn't show a lot of profit on paper because that's not the kind of business it is. And we don't accept any of your assets as collateral. So I was unbankable. I've been unbankable a big chunk of my life. And even now, I have a bit of financial security. I'm still unbankable. I have a friend or someone I know who tried to get a crypto collateralized loan and they asked, okay, where did you get these Bitcoins from? Well, this person mined the Bitcoins in 2009 on a laptop that he bought at a garage sale. They were asking, okay, send us a receipt for the mining equipment. Okay, I bought it at a garage sale I didn't ever receive. So he had a hell of a time proving his funds. He was able to do it eventually, but it was a paperwork nightmare. So don't think it's just like, oh, it's as simple as if you have the collateral, you can get the loan. Sometimes proving and tracing back these coins, you know, people lose records of their wallets. I couldn't tell you where, you know, some of my crypto comes from probably because I don't know because I lost the records. So, you know, keeping records for 10 years required to get a loan that might be one of the costs, the hidden costs. Well, especially when you're talking about something like, you know, Bitcoin in 2009 back when like there was nothing, like nothing at all. I mean, there is the blockchain. You always have the blockchain, but it doesn't tell you certain details that might be needed to prove the source of your funds and that it was legit. In this person's case, it was completely legit. It was like, you know, the most virginal innocent way to obtain Bitcoin ever. But, you know, he had trouble proving it. So, a company called Milo recently announced that they are providing or will soon be providing Americans with Bitcoin collateralized mortgages, which if you've been in Bitcoin for a while, you know that, you know, one of the largest instances of I need to sell my stack is I need to get my home or, you know, how do I get a house? No one acknowledges my assets. That's Andreas was talking about. And there are, you know, distinct differences between a mortgage and every other form of debt. And so we're kind of in the world where not only will a bank not acknowledge your assets as an asset, but if you took a loan out against your Bitcoin and then bought a house in full, that would be considered a loan. It wouldn't be considered a mortgage. And the difference is that when you take a mortgage out on your primary residence, you're actually able to adjust your income against the interest that you pay for your primary residence mortgage. But because your collateralized loan is against your Bitcoin and not against the house, that wouldn't be a mortgage, which would, you know, significantly impact your financial situation. And we're talking about a higher interest rate than you would get with a conventional mortgage if it's a crypto mortgage, correct? Yeah, incredibly so. And so this company Milo, we're not endorsing it, we're not promoting it, but we're just describing it as the first company we can think of that is claiming that they will allow you to collateralize your Bitcoin and collateralize the down payment that you put into the home equity loan. And then I'm hoping waterfall the payments so that it's home equity and then Bitcoin. And so you would need to effectively adjust your payments into the mortgage or adjust your Bitcoin in the contract contingent on the real estate and or Bitcoin price. But I'm enough of a Bitcoiner that if my Bitcoin goes down, I'd rather lose my house. Like I'd rather get a victim out of my house than I would have my Bitcoin be so old. Yeah, I know you can eat Bitcoin, right? That's what all the preppers say. I'm gonna live in my car and run an Antminer as my heater. Yeah. Hey, Satoshi suggested it, didn't he? Well, I think this is actually a good thing because it provides options, like I said before, for people who don't look good on paper to get a mortgage, but could actually afford to pay for a house and to pay the mortgage. Well, let's be clear, Stephanie. I don't think most hardcore Bitcoiners look good in person, either. Yeah, we're talking about a different kind of looking good, right? If you look good to the mortgage company, you're like a dependable person who has a steady job and gets paid the exact same amount every month and only utilizes a certain fraction of your credit and you're in the system and that's not any of us on the show and it's not a lot of people out there. And for those people to have another option that they could use to finance a purchase of a home, which is a really important thing in a lot of people's lives, that's a good thing. I'm not saying it's perfect, but maybe it'll get better as time goes on and there's even more competition and more options. So the question I would have in all of this is who has the keys? And to me, that's the critical question with all of these lending, collateralized loan, and mortgage solutions. Because it's not just mortgages, mortgages basically. As Jonathan said, you know, it's one of the things that secures the loan in addition to the house itself. If you're just taking out a personal loan, then all of the security is presumably in crypto. If you're using it as an over collateralized loan, then the Bitcoin is securing that loan. But the question becomes, how does that work with custody? I would assume that people are not just going to give you a loan if they have no way to seize or enforce a lien. Like how do you put a lien on Bitcoin? And the answer in most cases that I've seen is you give them the keys. You transfer the Bitcoin and they hold them. And you know what they say about that, Andreas? Right. Not your keys. Not your coins anymore. So you haven't collateralized the loan. You've effectively accepted counterparty risk in that case. And a lot of these loans have to be significantly over collateralized, especially if you want to get the best interest rates. Sometimes they want two or four times the amount of the loan in collateral. Right. So I wouldn't feel comfortable with that. Now, that's not the only way. The other way to do this is to have a collateralized loan that's based on a smart contract where you still have custody. And that's, for example, the way that you do it if you were using a lending platform based on a smart contract system, whether that's decentralized stablecoin loans like DAI on Ethereum, or it's something equivalent on any of the other blockchains. In that case, you're not taking counterparty risk. You're still taking risk. You're taking platform risk, smart contract bug risk, EVM execution risk, fee management risk, and all of those other risks, but they're different. They're not counterparty risk. So maybe that's more of your appetite. However, at the moment, as far as I know, there's no way to do that on Bitcoin. One proposed mechanism to do this is a technology called Discrete Log Contracts. Very interesting technology. If you want to look at that, proposed by Tad Stryja, one of the co-authors of the Lightning paper. The other phrase to look up would be Bitcoin Covenants, which is the same topic from a different take. If you're going to be looking more into the topic. Yes, and it's a hot and somewhat controversial topic on the Bitcoin developer mailing list at the moment because that's being discussed quite a lot. So with that format, you could do a collateralized Bitcoin loan where you don't give up custody, but the custody is essentially in a smart contract, which can be liquidated, adversely liquidated, margin called, if you like, based on the USD to BTC exchange rate that is provided by the centralized Oracle. That's how die loans work as well. And I've been on that side of the experience where you have a loan and then the price drops and the collateral isn't sufficient and you have to recolateralize it. I've also been on the other side of the experience where I've collateralized the loan that way instead of selling. And then the price has shot up. And because I didn't sell, when I rebalanced that loan and pay it back, I end up with a very, very nice profit on top of that, a very nice capital gains, which I wouldn't have made otherwise. And that's the appeal of doing a collateralized loan instead of selling. One of the things to keep in mind here is that on Bitcoin, at least for now, you have to give up custody in order to do that. Now, what about the other side of this? There's a flip side that I see, which is that a lot of these same companies that are offering crypto backed loans are also offering a crypto interest product where you invest or you let them hold your crypto. They lend it out to other people, I guess, to provide liquidity to exchanges, to let people trade on margin, I guess. And then they pay you interest for keeping your crypto with them. And usually it's paid in kind, but then a lot of these platforms also have their own platform token where you can get even more of an interest rate if you accept the payment of interest in their platform token and stuff like that. And so we actually got a question about this too. This person said, I've been involved with crypto for a few years now, but I have a hard time understanding the whole interest movement. They said centralized finance interests like Nexo are clear for what they let you see, staking for proof of stake protocols like ETH2 also okay, but all these new protocols providing absurd APY to provide liquidity, getting paid to lend and sometimes borrow at 10, 30, 50% or higher APY. Could you share your thoughts about it? And to me, I'm not sure if I understood correctly, but it sounds like the person is asking, how do these companies pay this kind of APY? Like, where is this money coming from? Who are they lending it to? And how are they able to offer this kind of yield? Well, in some cases, when these are decentralized markets, the dark truth of the matter is that these things are loan sharked to people who have no other way of getting loans. So if they're open on a decentralized market, there are people out there who will pay 30% because that's better than what they would get otherwise, which is 30% a day or your kneecaps type lending, still prevalent even in the United States. Yeah, this is like the pay day lending industry or the check cashing. Right, minus the kneecaps or plus the kneecaps. I don't know, my kneecap harassment take is rusty. Yeah, I mean, a lot of this stuff winds up being secret sauce, right? Like on the one hand, like these companies oftentimes are a little bit of a black box. Well, some of them are funding it with investors, like some of them are taking investor money and using it to bump up promotional rates to get people to invest in their platform, pay them a higher interest rate, and then they drop it down. And actually, you know, I've been watching this space a little bit. And a lot of these companies like over the last year have been just kind of dropping and dropping and dropping their interest rates that they offer. They're saying, you know, in response to market conditions, and as more companies enter the space and there's more competition and there's more liquidity being provided to whoever needs it, the competition is going to get stiff and it's going to drive the rates they can pay their customers down. A lot of them also have these limits of, you know, you can get a special interest rate, but only on up to a certain amount of capital. And, you know, that's one way of doing it. I don't know if they're using investor money to finance those or if that's just part of their mission because they want to make sure that small investors can get in and that it's not just like huge institutional whales that are putting their coins in there and then getting interest. Yeah, this is a tricky situation because you don't know how many of these are straight-up pyramid schemes. And at the same time, it's cynical to think that they're only pyramid schemes because for those who remember when PayPal started, they offered 20 bucks referral fee to you if you referred someone and to the person you referred. And in the first couple of months of operation, they spent 60 or 70 million dollars. But as a result, they acquired, I don't know how many 100,000 customers and managed to bootstrap that operation really, really fast by doing that. That's a standard Silicon Valley model for financing. So is that a pyramid scheme? Kind of. They're certainly using investor money to pay for all of that. And, you know, one of the things that I'm cognizant of is a lot of these things work really, really well when the price is going up two or three or four percent a month or a week. And then they stop working altogether. So we may not only see interest rates being squeezed by the decline in the price, we may see a lot of these things blowing up because turns out, yeah, they were pyramid schemes. And then, of course, they can't operate unless the market is always up. Yeah. And they have varying degrees of how transparent they are about their finances and how they actually custody these assets. You know, do they contract with someone else? Do they do it themselves? Or how do they prove that they have reserves or are they audited? Do they have insurance in case they have a theft or a loss or something? And some of them have run into trouble with regulatory authorities. And it seems to be especially the case that if they pay out the interest payments in their own platform token, that's something that, you know, they don't do in the U.S. because it would be considered a security offering or something like that. It's a regulatory no-no. Yeah. There have been a lot of challenges from the regulatory perspective. And it seems like these companies are still trying to struggle through and figure out how to make these types of products work without actually becoming banks themselves. And of course, some of these companies probably will become banks or be acquired by banks or acquire banks themselves and kind of get around it. But until then, it's a little bit of a tricky thing in the U.S. They've been trying to acquire banks. The old AOL buys Time Warner model of disruptive innovation. But they've been stopped from doing so. In many cases, many of these organizations have tried to buy banks and the regulators won't even let them do that. Which is interesting. You know, nobody stopped AOL from buying Time Warner, but this is a new world where in banking, things don't work that way. When times are good, sometimes it's good to take profits. Yeah, caveat depth. The funny thing is that while there's a lot of cautionary tales and I emphasized previously that the custody issue is critical, not your keys, not your coins. But then again, if this is a matter of a choice between collateralizing some of your Bitcoin or other cryptocurrency to pay rent and selling it, well, if you sell it, then they're definitely not your coins. Whereas if you collateralize them, there's a possibility they might not be your coins. You have counterparty risk, but it's not a certainty. If you sell it, it's a certainty. So this may be a better than nothing solution in some circumstances. But as with everything else, don't go all in. Yes, and paradoxically, you may have to settle a little to... Huffle a lot. I'll take it. That should be on a T-shirt. So folks, that's all the time we have for this episode of Speaking of Bitcoin. Thank you very much for listening. Today's show featured Andreas M. Antonopoulos, Stephanie Murphy, Jonathan Mohan, and myself, Adam B. Levine. This episode was edited by Jonas. Our theme song is from Jared Rubins, and our other music is from Gertie Beats, Straight From the Street. If you have any questions or comments, you can send us an email at Adam at speakingofbitcoin.show, and we'll see you next week.