But the amount of Bitcoin has not changed. So where is the yield?
When I buy a bond, I’m getting more dollars back. That is the yield. Like a 5% interest savings account. Or like how Celsius was offering x% yield on crypto. The yield is the percentage you’re getting back. And the risk is that they lose all your money.
In the case of a Bitcoin loan, the Bitcoin’s value goes up. But the amount of Bitcoin is the same. That’s why I said 1 Bitcoin = 1 Bitcoin. There is no yield with a Bitcoin loan. The growth in value in fiat terms has nothing to do with the loan. The risk is that the person holding your bitcoin while you pay back the loan can rug you. But that’s still not yield. The value of your bitcoin would be the same if you never took out the loan and never sold it. So it’s not yield.
Unless my understanding of yield is different from yours 🤷♂️
The internet seems to have conflicting definitions of yield.
Replies (4)
The 5% interest in a savings account is supposed to come from the people who are borrowing your money at a higher rate. You and me both know that's not how it really works, but that's still how most people see it.
I know the total supply of Bitcoin is fixed, and that there is no "native yield" to Bitcoin. But if you lend your Bitcoin to someone at 5%, and they are able to repay, then you get a 5% yield.
The fiat/Bitcoin yield is much more sustainable because your liability is dollars. When you get a loan, new dollars are created. So let's say you gain $10,000 in dollars as an asset, and owe back $11,000 as a liability in one year.
By buying Bitcoin with the dollars, you get Bitcoin and you also increase the marginal price of Bitcoin. Combine that with Bitcoins fundamentals, and as long as the Bitcoin is with more than $11,000 in a year, you get to keep the difference in Bitcoin. That is your yield.
The yield comes from the people who sold you the Bitcoin at the lower price. That is the game currently being played.
But the amount of bitcoin has changed.
To calculate yield, you need to look at how many bitcoin do you have at the unwind of the leverage compared to the amount of bitcoin you hold had you not levered (which in the case of a car loan is the lesser number). You must take as a given a car will be bought and you will either borrow dollars or sell bitcoin to get it. You can’t compare to the scenario of doing nothing.
What may also seem confusing is this type of leverage multiplies yield by less than 1 (minimizing lost bitcoin) which seems strange to financial types who can only see leverage as magnifying yield.
He means Yield in nominal terms
We are not on a bitcoin standard yet, so yields in terms of bitcoin is not possible … yet
Think of it this way, if I had borrowed $40000 to buy my wife’s minivan, I would have saved 7 bitcoin. I effectively bought those 7 Bitcoin over time with each loan payment. So those 7 bitcoin were dca’d into over say 5 years. My return over 5 years is undoubtedly less than had I just held those 7 Bitcoin, because my cost basis moved up, but remember we are comparing against having sold the bitcoin, not merely hodling. After paying off the loan, you have 7 bitcoin and a vehicle.
