My 6 Rules for Choosing a Bitcoin Lender

If you've thought about using your Bitcoin as collateral for a loan, this is probably the single biggest question that you have because it's the single biggest question I've ever been asked. Tens of thousands of times I've been asked this question, which Bitcoin lender should I use? Now, this is a very good question to ask because the risk of getting it wrong means potentially losing everything. It's happened before. Now, a lot of people think that they should choose just based off of rate, and that is the wrong place you want to start. Get this right and you could build generational wealth by unlocking liquidity against your Bitcoin. But if you get it wrong, You could lose it all like so many people before you. So in this video, I'm going to break down 6 things that you want to look at when you're vetting a Bitcoin lender. And again, this is important. Don't miss this. Let's go. All right, so let's just jump in. Like I said, this is super important and it's probably the number one question I've been asked. My biggest viewed content has been how to retire from Bitcoin, how to borrow against your Bitcoin. And so then they ask, who should I use? And like I said in the intro, Most people ask that question based off of just the rate and they think, who's the best lender? And they think about the rate. And again, for me, the rate is the 4th thing I should look at. So let's go through this list here. All right. How do we vet a lender? So the very first thing I want to understand is I need to understand that if I'm getting a loan against my Bitcoin, if I'm issuing credit against my Bitcoin, then there's 2 ways I want to think about this. So the first thing that people think of is, wow, what about all those people that lost money with Celsius and BlockFi and those types of companies? And you have to understand what actually went wrong there. You see, people want to get a loan against their Bitcoin, but they're afraid to give up control or custody of that Bitcoin because they lost some in Celsius or BlockFi, or they heard, or they know people that did. And so they go, well, I want to get a loan, but do I have to give up custody? I don't want to give up custody of it because I may not get it back. That's actually the right way of thinking about it. But we have to understand that a lot was learned about what happened in the past, right? We've learned from our mistakes. Hopefully businesses are now set up different. And we have to understand there's a big difference between custody and ownership. So the first thing I want to understand is collateral and control. So who controls the Bitcoin and who controls the collateral? So when I gave it to BlockFi and when I gave it to Celsius, I also gave them ownership of it. So they had the collateral, they had control over the collateral, and they were able to do all types of things with the collateral that I didn't know they were doing. So I— when I gave it to them, I gave up the control. So the first thing I want to understand is the difference of Collateral custody and ownership. And so in some of the companies today, we're working with what we call DeFi. This is DeFi is decentralized. And then we have CeFi, which is centralized. So if I'm going to give up my money, I have kind of 2 options. If I want to give up Bitcoin to get a loan out, I can put it into some protocols, some smart contracts into decentralized finance, but now it's governed by a protocol, by a smart contract. And I have to understand that the risk is that there could be a bug in that smart contract, there could be a bug in that platform. So a lot of people might use Aave, for example, but Aave's had problems. Aave's been hacked. We know that a lot of the smart contracts in DeFi have been hacked. It happens all the time. Now, do I trust that protocol? Do I trust that smart contract? Do I know how to write code? Can I inspect the code? And so the rate might be lower, but what risk does that pose when I don't understand the code, but I do understand the history that smart contracts and decentralized protocols get hacked. The other option is I have CeFi. So now I have a centralized lender. So now I have a company. I know who the president of the company is. I know who the board members are, and I have to trust the company as opposed to the code. So the first thing is you have to understand the collateral. Where does the control of the collateral go? To some decentralized software protocol that I maybe trust or don't trust, or a centralized company that I do trust? Okay. The second thing that I want to understand is What are they doing with my collateral? So back to Celsius and BlockFi, you've heard with social media, they say if you don't pay for the product, you are the product, right? So since social media is free, you are the product, they're harvesting your data and selling you ads, right? With BlockFi and Celsius, they were doing something called rehypothecation. What rehypothecation is means it gets loaned out and loaned out and loaned out and loaned out again. So they were taking all kinds of unknown risk with my money that I didn't know about. So they were giving me a low rate. They'd give me a loan at say 1%, but they were adding all this additional risk to my collateral by doing this rehypothecation. The way rehypothecation works is let's say that I have a candy bar. So I have one candy bar and I'm going to give it to you. I'm going to loan it to you. So now you have the candy bar, but I also hold the candy bar on my books because you owe me one and then you give the candy bar to someone else. So now they have the physical candy bar, but they owe it to you and they owe it to you. So now on paper there's 3 candy bars, but there's really only one. And this guy right here decides to eat it and now all the candy bars disappear at the same time. And so they'd loan out the Bitcoin, someone would loan out the Bitcoin, loan out the Bitcoin and they cause this rehypothecation. So the next thing I want to check is what are they doing with my collateral? Are they rehypothecating? Are they loaning it out? Me personally would never want to do a loan against my Bitcoin, issue credit against my Bitcoin to somebody who is also going to loan it back out because I've vetted you but I don't know who you're giving it to. I don't know if I want my Bitcoin put into that much risk. So that's the next thing I'd look for. Then I want to understand the third thing is margin calls. So everyone's afraid of margin calls. What happens if, you know, Bitcoin is volatile, it goes down and I owe this much money and then they're going to have a margin call. So I want to understand what happens in the event of a margin call. I want to understand at what levels do we hit the margin call. So some lenders might let you go, some of them might let you go as high as 90%, 80 to 90%. LTV before you get a margin call? Do they give me a curing period? Do they give me, you know, days or weeks or months to cure that? Or do they instantly liquidate me? Some lenders maybe have really high margin call levels. Some lenders even have loans where they can protect you from margin calls, and some have no margin calls at all. So that's something that I'm really looking at. How will they treat my capital, my collateral, in the event that the LTV gets upside down, And I get into a margin call event. So now that I've given you that part, let me tell you how to make this actually really, really easy to do that will take almost no of your time at all. But before I give you that, I want to say that this is why building wealth isn't only an investment problem. If your business, your assets, your taxes, liquidity, and decisions all depend on you remembering what to do next, then you don't have a system. You have a very demanding job. So I want to put a QR code on the screen right here. And you can just scan that real quick. And my team can help you map the financial decisions that still depend on you and begin turning them into a wealth operating system. With rules, roles, and repeatable processes. Then finally, the 4th thing that I'm looking at is the cost of credit. So why would I want to pay 5% in some DeFi protocol that I can't understand the risk, that has no guarantee, when I could pay 8% to a centralized company that I could trust that would give me insurance against it? Well, I'd gladly pay 3 extra points to have a guarantee insurance contract than get something a little bit cheaper because of the risk. You see, most investors don't think about risk. They always think about what is the return I can make without the risk. Think about a hedge fund. So professional investors on Wall Street have hedge funds, but think about what that even means. Hedge fund. Hedge is the first thing. Every position is hedged. Every position goes out with a known quantified risk. And the reason why they do that, they hedge it, it does potentially lower the returns they could make But it also lowers the downside. And so we're not just thinking about what is my total return, I have to think about what is the risk that I'm taking. And so personally, I would much rather take an 8% loan, a 9% loan with little to no risk than a 5% loan that has unknown, unquantifiable risk that I can't mitigate. So I want to understand the cost of the credit is fourth. And so certainly if I could get apples to apples, this company I trust and I have insurance, and this company I trust and have insurance, and one's a little bit cheaper. Sure. Okay, then maybe I'll look at the rate. But I want to look at the rate after I've looked at these things. Then I want to understand duration. This is something that is one of the most misunderstood things from the normal retail investors, but is known in the world of finance is I need to understand the duration of loan. Time is money, money is time, right? And so how long is that loan out? The US mortgage loan is one of the best financial instruments in the world. We get 30-year fixed-rate loans. It's amazing. But most Bitcoin loans are typically 1 year. But the problem is that Bitcoin is volatile. So I don't know where the price of that loan will be in 1 year. Now, some mark to market that daily or weekly or monthly. Some loans might be only monthly, some might be yearly. And some of these lenders have no duration. Some of these lenders will let it stay open forever. So I need to understand so I can match my liability to the asset. I need to have duration match. It's actually, if you remember back to 2023, there was 3 banks that collapsed really quickly, Silicon Valley Bank being the big one. And the reason why they crashed was because they didn't understand duration. It was a duration mismatch that caused the problem. What do I mean? They took in customer deposits. Customer deposits are due on demand, meaning as soon as the customers want the deposits back, they have to get them. They took money back that was short-term money that they have to pay back at any time. And they put it into long-term debt, 30-year treasuries. Now, the problem was that the treasuries were volatile. And so when the customers wanted their money back, they had to sell the bonds. But the problem was the bonds were not worth as much as they were at the time they bought them. Now, if they held the bonds to maturity, they'd get all the money back, but they couldn't hold them to maturity because the customers wanted their money today. They were forced to liquidate. They had a massive loss. The banks went out of business because they didn't understand duration. So I want to understand the duration of my loan Is it monthly? Is it yearly or is it perpetual? Some lenders have that. And then finally, I want to understand the counterparty and the legal side. So again, there's control and there's ownership. So if I give my Bitcoin up to Celsius or BlockFi, not only did I give them control, I also gave them ownership, which by the way, the money in your bank is not your money. You've also given up custody and ownership of your money. The bank now owes you the money. The stocks in your brokerage account, you've given up both control and ownership. The brokerage owes you the stocks. They're not owned by you. They're owed to you. Kind of the same thing, but legally it's not. The reason why it's not the same legally is because when BlockFi and Celsius went bankrupt, they were counted as their assets in bankruptcy court, not your assets. So I want to make sure that yes, I may be giving up control of the asset, but I want to retain ownership of the asset. And I want to understand who my counterparty is and what the legal nature of it is. Is it still in my name? Do I still legally own it? Now, like I said, this is the number one question I get asked as soon as I talk about issuing credit against Bitcoin, which lender do I choose? So hopefully this 6 parts helps you out. But let me just tell you real quickly, if you don't already know, why do we want to do this? So currently right now, the 4-year rolling average of Bitcoin is a 30% CAGR. Now what that means is that about every 2.5 years it doubles. So that means if I have $1 million here, in 2.5 years it's 2, and then it's 4, and another 2.5 years it's 8, another 2.5 years it's 16, and then it's 32, and you get the idea. And so rather than going from $1 million to $2 million, selling it and going, woo, I can pay off my house, pay off my debt, and look at me. Okay, well that's good. What you've done is you've given up $32 million if you would have just waited. And so what we can do is we can use this stack and issue credit against our Bitcoin to pull the $1 million out that you want to pay off the house and the debt, but we can continue to let the Bitcoin ride so we get the $32 million back here. That's why we want to issue the credit in the first place. But again, do not do it until you've vetted your lender against these 6 things. or you're going to get yourself in a lot of trouble. Now, if you want to know how Bitcoin and issuing credit against your Bitcoin isn't just about Bitcoin, it's about allowing all of your assets in your wealth operating system to compound together so it doesn't just increase the rate and the time that's needed to get to your goal, but it changes your entire generational bloodline on top of that. If you want to know more about the wealth operating system, I'm going to put a link right here. There's 3 engines that make it powerful. I'm going to break it all down for you right here. So go click on this video and I'll see you over there.