Never Sell ETH

Join #neversell gang with internet bonds and collateralized loans

0xjim

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Published in

Coinmonks

9 min readMay 5, 2021

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As always, this article is made for educational purposes. This does not constitute financial advice nor trading advice. Past performance does not indicate future results.

Do not invest more than you can afford to lose. This is not financial advice; always do you own research :)

I’m never selling my ETH.

I feel like people give me a weird look whenever I say that.

“What do you mean never sell?”

The same definition as everyone else:

Two reasons for this:

I believe in Ethereum’s vision of the future
I can get cash when I want without selling — through internet bonds and collateralized loans

The Vision for Ethereum

Today’s Use

I’ve written about Ethereum and its native coin Ether ad nauseam — talking about its utility as the most useful cryptocurrency right now.

You can so much with Ether, and that reason is enough for never selling Ether — simply because you need it in order to participate in DeFi and other Web3 applications.

I need to have ETH to use as gas in order to power my transactions on Ethereum, so that I can manage my DeFi apps, purchase NFTs, register a decentralized user name, and so much more.

Selling ETH would be like selling gasoline when you need it to power your car.

Future State Use

Zooming out, Ethereum still has so much room to grow into its vision as the world’s supercomputer: a permissionless, open platform for building anything.

David Hoffman of Bankless says it better than me:

Ethereum is the settlement layer for the digital economy… I’ve said for a while that the extent to which ETH is money is a function of how much Ethereum is the economy…
I expect the global economy to become synonymous with the Ethereum economy… As Ethereum becomes the canonical economy, ETH becomes the canonical store of value asset.

Ethereum will enable the next wave of the internet, Web3, where not just information but the entire economy — and the transfer of money and value — are digital-native.

As a result, ETH will be the asset that powers this new internet.

It’d be analogous to if today’s internet had a tokenized representation — the combination of all the intertwining networks, the fiber cables, the electricity, etc. And everyone needed to have this token in order to use the internet.

Wouldn’t you want to hold that asset?

Can’t Time the Market

I’ve resolved to the fact that I’m not a good trader — meaning that I can’t read the candle charts and indicators and accurately predict whether an asset will go up or down.

There’s a stat that 90% of day traders lose money, and while I haven’t assessed if I fall into that bucket of net-loss traders, I’m definitely either making less money than I would’ve if I had just HODL’d, or I’m making the same amount of money with considerably more investment from a time and emotion perspective by day trading.

I’m definitely starting to subscribe to the age old adage that time in the market beats timing the market.

Instead of quickly buying and selling ETH, I’m just going to hold onto it — and slowly accumulate more over time with periodic buys.

As a result, I free up the time and mental exertion of watching the market, allowing myself to do other things (like write blog posts lol).

On a day to day basis, it seems like ETH has wild up and down swings, but zooming out, ETH actually closed 8 straight months of gains — something I would have never realized by trying to time the market.

If the market crashes, then I’ll still hold, and I’ll accumulate even more ETH during that time period. That’s how high of a conviction I have for Ethereum’s vision and that Ethereum will be a foundational part of the new internet.

I’m definitely either making less money than I would’ve if I had just HODL’d, or I’m making the same amount of money with considerably more investment from a time and emotion perspective by day trading.

Access to Cash Without Selling

The only reason I would sell ETH is if I needed cash for something else.

That could either something IRL that’s denominated in USD (or wherever I find myself living), or another coin/equity that I think has a better ROI.

I’m hesitant to even entertain the second bucket, because I strongly believe that ETH is the best risk-adjusted asset that you can be holding.

Regarding the first bucket of needing USD, there are two options that I can explore to get access to the dollar without selling my ETH:

Internet bonds (i.e., staking)
Collateralized loans

Internet Bonds / Staking

Proof of Stake is a widely adopted consensus mechanism in crypto — used in chains like Tezos, Cardano, Cosmos, and soon Ethereum 2.0.

At a high level, Proof of Stake (PoS) uses money to secure a network and allow for the agreement of valid transactions on the blockchain, whereas Proof of Work (PoW) — the consensus mechanism that Bitcoin uses and Ethereum currently uses — leverages computational power and electricity as the means for securing a network.

One of the implications of switching Ethereum from PoW to PoS is that the transaction fees (i.e., gas fees denominated in ETH) no longer to go miners but rather the validators who “stake” their ETH holdings in order to secure the network.

Unlike PoW which has a high CapEx to start a mining operation these days, PoS allows for anyone to essentially “stake” their ETH in order to participate in consensus.

The even easier path is to simply delegate your ETH holdings to established validators, and these validators will share their transaction fees (i.e., revenue) with you.

The net of this is that you generate an interest rate from your ETH holdings — denominated in ETH of course.

Some models predict that the APR for staking ETH could be as high as 25% at the beginning periods of ETH2, and over time the annual reward rate is anticipated at ~3-5%, which is a stark contrast from the approaching near-zero or even negative rates of the Treasury bonds of sovereign nations.

Like Treasury bonds, staking on Ethereum is essentially “risk-free”. This annual rewards rate represents Web3’s risk-free rate — providing a benchmark by which to evaluate participatory risks and returns, meaning that DeFi apps will offer an even higher interest rate than the ETH2 staking APR as a result!

You don’t hand over your ETH to any validators, you simply hold onto your ETH and “delegate” and receive money. The drawback is that there’s a cool down period before you can move your ETH again, but I have no plans to sell so it doesn’t matter to me.

So to recap, you can generate more ETH from your existing ETH holdings.

But that means, if I need cash, I have to still sell my ETH, no?

Here’s where the next part comes in.

Collateralized loans

Collateralized loans have been in the TradiFi (traditional finance) space for as long as I remember — where an individual would “secure” their loan by offering up another asset in return.

For example, mortgages and auto loans are considered collateralized because the lender (usually a bank) can ultimately reclaim the underlying asset — the house and the cars — and sell them for cash.

Crypto has the same concept slightly modified. Instead of collateralized an IRL asset, you can collateralized your crypto and get another asset in return — whether it be another coin or USD.

The best part is that I don’t pay capital gains tax on this loan because I haven’t sold my underlying ETH yet.

DeFi apps like Maker, Compound, and Aave are leaders in the space for collateralized lending — all of them offering ways to collateralize ETH and receive USD that can then be withdrawn into a bank account to pay the bills.

The issue with collateralized loans is that you can be liquidated.

Because these are currencies that have fluctuating exchange rates with USD, if the value of ETH falls below a certain threshold, the DeFi protocol will liquidate your position in order to recoup their costs — meaning that they will sell your collateralized ETH for USD and charge you a fee for doing so.

Meaning you lose lots of money. Not ideal.

To combat this, individuals often have to keep a close eye on the price of their underlying asset to ensure that they don’t get liquidated — which is pretty annoying and not sustainable for many folks.

Luckily, there’s two new DeFi apps that address this cognitive burden of liquidations: Alchemix and FlashStake

Both DeFi apps essentially prevent you from being liquidated; they do that by giving you your yield ahead of time.

Meaning that if you were to earn 25% of your ETH per annum, you could borrow that yield upfront instead of waiting till the end of get that yield.

The catch is that if you don’t return that yield, you’ll be unable to withdraw your collateral into that yield accrual period is over.

So if you gamble away two years’ worth of yield, you won’t be able to withdraw your ETH for two years.

Which — again — is perfectly fine when you’re #neversell gang.

Closing Thoughts

I recognize that never selling ETH isn’t a viable strategy for everyone.

People need cash to keep the lights on, people like exit strategies, people want to decrease their exposure to risk, people like to day trade.

There’s a slew of reasons for why #neversell is a dumb idea, and I may be eating my words in a couple of years.

I also recognize that it’s a privilege for me to dedicate a decent portion of my earnings into risky assets like crypto.

But hopefully I’ve convinced a few folks through my logical breakdown of why I’m never selling. We’re still early in a potentially world-changing technology.

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