Why spend, when you can 'Invest-to-spend'?
why 'Invest-to-spend' will be the next big thing in crypto?
The big problem is Crypto Exchanges worldwide are running out of 'risk-takers' and ideas
Crypto exchanges have acquired about 300 million crypto investors ( early adopters / risk-takers ), this is roughly 4-5% of the world's population. This is incredible growth for such a nascent industry, however, the steam might be running out the next time.
There are three main problems now
1) Crypto is no longer the fad it used to be, so everyone who wanted to be involved in these schemes is more or less invested already.
2) The vast majority of these investors are facing huge losses, and many are staring at bankruptcy. Regulators will be forced to act upon this time.
3) The more important thing is exchanges are running out of new ideas to attract users.
Krishna Yogi
Now there's a way out, thanks to 'Crypto-backed loans' packaged as 'Invest-to-spend'
The next cohort of users is going to be normal users who simply like everyday shopping & travel which will be 500 million users.
Now imagine yourself as a 25-year-old Instagram user.
We know, you want to take that expensive holiday to Dubai which boasts the world’s tallest building the Burj Khalifa, but deep down you feel like it's a waste of money and the bill hurts once you come back from the holiday, doesn't it?
Imagine this, you want to take that expensive holiday worth $6000, you buy Bitcoin worth $10,000 and get a loan of $6,000 against it (instantly without any credit checks as its a collateral backed ). You can use this amount to go on a holiday and all you need to do is pay a monthly interest of $50 as long as you want to keep this loan.
If you decide not to pay the monthly interest, the loan will be closed by selling off equivalent Bitcoin to the loan amount of $6000 and the rest will be transferred to your account.
However, if you decide to keep Bitcoin, There are two scenarios that can happen now!
Bitcoin goes up
Let's say Bitcoin goes up by 100%, and your investment will now be worth $20,000, which means you will now be eligible to take an additional loan of $6,000, it's entirely up to you what you want to do with this money. You can use this money for a second holiday in Paris :)
if Bitcoin goes down
Should Bitcoin go down by 30% or larger, you could close the loan by selling off the bitcoin, so no harm is done and most important no risk to your credit score.
However, Since Bitcoin is expected to go up over time, you can expect to get more and more holidays and shopping trips from time to time!
Sounds like a good deal, doesn't it?
Bitcoin - The world's best Store of Value
Bitcoin is now widely being accepted as a store-of-value / money network (at least among crypto users ) and a perfect one at that compared to traditional store-of-value money assets like Gold.
As fiat money ( dollars, Euros, Yen Rupees ) gets printed at a rate of 5-500% annually storing it in a Savings account like Bitcoin could make sense.
what that means is if governments print more and money store of value assets like Gold and Bitcoin keeps growing in value over time ( here's a more detailed explanation about Bitcoin and its use-cases and why one should never sell it )
Krishna Yogi
Pros for Users
- Allows users to spend ‘guilt-free’ and 'Debt-free'
- Allows users to get a second holiday / second shopping spree should the price of Bitcoin go up
- No Credit-checks required, Doesn't affect Credit Rating
- No capital Gains tax
Benefits to Crypto Exchanges
- Removes the boring ‘investment tag of Bitcoin’ which 99% of the population is not interested in.
- Allows crypto investments to be flashed on social media in the form of holidays and shopping.
- Allows people to get a second holiday/shopping spree ( when the price of Bitcoin goes up), which will create a mania of sorts when posted on Instagram and makes crypto investments become a sort of 'magic money machine' in users' minds.
- Helps monetize your existing user base on an ongoing basis instead of the 'user burnout' created by alt-coin promotion currently.
- Helps create a constant revenue stream for exchanges no matter the sentiment of the crypto ecosystem.
- Last but not least, Partner with different merchants and earn significant affiliate revenues ranging from 5-25% ( holidays, shopping etc ) compared to the meagre 0-0.1% trading fees.
Beware of Security risks though
As crypto is fundamentally a digital asset, security is of utmost importance. The industry has evolved two different security models for crypto-backed loans
- CeFi- stands for centralized finance where a centralized crypto custodian holds your crypto and offers a loan against it
- Defi - stands for decentralized finance where decentralized lending protocols are built on blockchains like ethereum etc
The biggest problem with Centralized custodians is 'trust', you need to trust the crypto lender to keep your Bitcoin safe and history is filled with instances of centralized custodians abusing that trust like the case of Celsius which re-hypothecated user's Bitcoin for earning yield and ending up in bankruptcy.
Here's a more detailed explanation of various risks of centralized custodians and why they are not sustainable over the long term
DeFi platforms are not without their issues though, most Defi platforms use WBTC ( or renBTC ) which is a wrapped Bitcoin issued by centralized custodians like Bitgo which has its own set of problems as it's again 'trusting' the institution to keep the funds safe. The worst part is that if the bitcoin at Bitgo gets hacked, there is no fallback.
Krishna Yogi
Can CeDefi combined with multi-sig wallets offer a truly trustless set-up?
With a 2/3 multisig wallet, 3 users or keys are used to create an address however you need atleast 2 users to sign to move the funds out of the 3 users, this user's no single party can unilaterally transfer the funds at the same this set up offers incredible security benefits that can never be possible with centralised custodians.
Combining multisig with Cedefi will enable a crypto exchange to borrow against bitcoin on behalf of their users which ensures the security of users' collateral.
Thus Cedefi offers the UX of a CeFi with much better security than Defi and will finally help Bitcoin-backed loans reach mainstream acceptance.
Disclaimer: This is not financial advice, this information is purely educational, All Investments carry risk. Always do your own research.
Useful References:
Why is Bitcoin considered the world's best store of value?
will Bitcoin replace the Swift network?