If You Had Ten Bitcoin
What if you had won the latest Internet Lottery?
What if you had accumulated ten bitcoin at an average price below $5,000 per bitcoin and today they trade around the $50,000 range?
Remember the end of 2017, when Bitcoin spiked up to $20,000 on a feeding frenzy amongst retail investors in South Korea and Japan? You might have felt quite smug selling some of your Bitcoin near the top and watching the price slump down to the high 3,000s a year later. Perhaps you bought a few as it languished and were delighted when, six months later in July 2019, it was threatening $12,000. Then, doubt crept in once again nine months later when the price dove for the $5,000 levels. But, you bought the dips, and now you have BTC 10 with a cost basis of around $5,000 a coin.
You realize there is volatility baked into this cake.
Let’s assume that you have a job with a 401-k plan and the ability to save a bit from each paycheck.
What are your options? What can those 10 Bitcoin do for you?
The first choice is to sell them. Coinbase just listed with a $60bn market cap built largely its ability to make the buying and selling of Bitcoin pretty easy. If you think Bitcoin is at or near an all time high, that might be an option. The net result: you will have a big tax bill on the roughly $450,000 in gains and you are out of the Bitcoin game for now. Perhaps that is where you want to be. But for me, the idea is to stay in the Bitcoin game to see where it ends up.
Another option is to deposit your Bitcoin to a Crypto Debit Card, enabling you to sell a small amount with every swipe. These cards work pretty well in practice but you are still selling BTC and realizing capital gains that the tax man will want to know about. The result is that every swipe reduces your exposure to Bitcoin, and at the end of the year the Debit card company will send you a massive tax bill. A slower version of the first choice but make sure that is what really suits your needs.
An emerging third option is to borrow against your Bitcoin stash. BlockFi and Abra are two companies that will lend dollars against Bitcoin as collateral. The loans are generally structured as 1 or 2 year loans with interest only payments and a final balloon payment at maturity. Since you have not sold your BTC at any point, there are no capital gains to be taxed. This option will definitely work for some but the counterparty risks are not insignificant. Some have equated the business models to the “wildcat banking” of the Old West because the companies are lending the BTC collateral out to earn an interest rate spread. Nothing wrong with that; but the Bitcoin Banking Market is new and largely untested. The Cred Bankruptcy has shown that companies can simply default on giving your Bitcoin back. Also consider that the balloon payment is holding your Bitcoin hostage until you finding a new source of cash; if you don’t pay, they’ll sell your Bitcoin, send you a 1099-B and you’ll have paid taxes AND interest!
An emerging fourth choice will arrive when the SEC allows Bitcoin ETFs to come to market. Unfortunately, it seems unlikely that relatively small holders (less than BTC 1,000) will be able to deposit BTC and receive BTC ETF certificates. So it is likely that you have to start in US dollars rather than Bitcoin. But, if that functionality were enabled, one could “securitize” the 10 Bitcoin into ETF certificates and deposit them into a margin account with any broker/dealer. Depending on account features which will vary slightly from one broker to the next, one could use the BTC ETFs to buy more securities or take money out of the account and pay relatively low margin interest rates.
Looking at the options, we decided to build a new path. You could have some of the functionality of a margin account without the need for a broker or an Authorized Participant status with an ETF provider. We will help you stake Bitcoin within a wallet and open up a line of credit with a regular commercial bank. Within the line of credit parameters, you could draw down money as needed. That way, you could tap the value of your 10 Bitcoin without having to sell the Bitcoin or take more counterparty risk than may be comfortable.
This sounds a bit like a Home Equity Line of Credit. HELOCs are popular because no one wants to sell a child’s bedroom to renovate the kitchen. You create a lien on a title to the house. And this is the core innovation that Flux created. We place your Bitcoin into a secure wallet which is time locked against any movements and issue you a security. Banks place a lien on that security and lend money against it. Just like the bank might have a lien on your home or your car title, we help you create a lien on your Bitcoin.
Our services help you to keep “stacking satoshis” (remember, you don’t always have to buy a whole Bitcoin) and use the flexibility of the credit line to pay for things in dollars. As long as your spending is under control and you think that your buying and Bitcoin’s price appreciation will grow faster than your spending and the annual interest rate, this forms a key part of your personal retirement and cash management process. And since it is a line of credit, drawing down and paying back are, within the confines of the total loan agreement, totally up to you.
So, if you won the latest Internet Lottery and are sitting on 10 Bitcoin, Flux’s Bitcoin Card may be the right choice for you. Now you can put a valuable asset to work without incurring a big capital gains tax bill, and you can build a savings program that involves stacking sats at the top of the funnel and drawing dollars out the bottom as needed. If you’re like us, and a Long Bitcoin/Short US dollar strategy is how you want to position yourself in the coming few years, the Flux Bitcoin Debit Card program is a useful tool to establish and maintain that position. It’s how we deliver on our slogan: “Save Bitcoin | Spend Dollars”.