I tweeted that I want to take advantage of the interest rate spread on crypto lending. Basically, get a cheap loan somewhere, deposit it in a crypto savings account, and pocket the difference.
This is covered interest rate arbitrage. Here’s an example:
- Take out a 100k loan at 2% interest.
- Deposit in a savings account that pays 10%. Leave the 100k in there for a year, earning 10k.
- Pay back the 2% interest on the loan, which is 2k.
- I now have 108k.
Celsius pays 10% on the USD-pegged stablecoin, USDC. From Interactive Brokers, my blended collateralized interest rate is 1.423%. That difference is of course, 8.577%.
Because I have 150k in Interactive Brokers, and it requires 50% collateral, I have a loan of 75k. Fidelity’s terms are 40k loan at 4%.
On my Fidelity account, it’s 4%.
I’ve compiled the results in a Google Sheet that is embedded here:
They’re not great. After-tax, I’m getting $18,807.41 on $309,562.99 invested, or a 6.076% annual return. While very low risk, still not fantastic.
The last column shows the profits if the company doing this arbitrage was headquartered in Puerto Rico, where the corporate income tax rate is 4%.
That is $26,093.86 on $309,562.99 invested, or a 8.43% annual return. 39% better.
This is a very low risk strategy compared to investing in stocks, bonds or crypto currency. However, there are risks.
The main risk is that one of the lending platforms (Celsius, BlockFi, Nexo) folds / gets hacked and doesn’t return funds to investors. They have significant insurance via their custodians; this will always be the risk the uninformed brings up, and the perceived risk is why there is still such a large interest rate differential. For those reasons I won’t go deeper.
Not Reading Contracts
The other risk, which is purely executional risk, is making sure that:
- There are no early repayment penalties on the loan.
- There are no limitations to withdrawals from the lending platforms.
If #1 and #2 are true, then if the difference in interest rates collapse, the arbitrage can be covered before any losses incur.
I need to shift this income to be for the business, not me, so that the cost of the interest is subtracted from the profit, and I’m only taxed on profit.
Going to continue to see if I can find loans that are profitable and large enough. I would like for that interest to be shown as revenue for Hunter Monk LLC, which then allows more favorable loans.