Buying Real World Assets By Leveraging Crypto
By Shahar Abrams
A lot of people say crypto has no “real-world use cases”.
“What can you buy with it?” someone will ask, at which point the other person will shrug back “JPEGs on the internet?”
The truth is, you can use crypto to buy anything you want in the material world. You can even enjoy the same tax perks used by the wealthy when they buy things, by borrowing against your assets instead of selling them.
In this article, I’m going to show you how you can use all sorts of crypto assets to make real-world purchases while staying invested, minimizing your tax bill and generating cash flow.
Does it really work? Yes, it does, and I’ll show you how.
Since I was a child, I had two major material goals:
– A home with a view
– A Steinway piano to put by the window
Last week, I used a crypto platform called Abracadabra.money to take a loan for $720,000 in Magic Internet Money (MIM). I converted my MIM into the well-known USDC stablecoin. I then transferred the USDC to Coinbase to be converted into the variety of USD issued by Uncle Sam, and from there into my Bank of America checking account.
I proceeded to purchase both items on my list, paid for with good ol’ greenbacks. The sellers never knew that the cash I paid them with originated as Magic Internet Money on a platform called Abracadabra.
But that’s not even the best part. The collateral I put up for the loan (all loans in DeFi are overcollateralized — more on that later), still generates yield while I’m borrowing against it.
You heard that right. I’m being paid to take out the loan, and my collateral is currently yielding roughly five times the loan interest rate. That’s enough to pay the interest, monthly HOA fees, property taxes, maintenance, and still have some left over.
I’m being paid to take out the loan and my collateral is currently yielding roughly five times the loan interest rate.
Meanwhile, I am able to realize purchasing power from my investments — without having to incur capital gains taxes from selling them.
Now, not everyone may be in the market for a $700k condominium, but I want to highlight how this strategy can be used to buy anything. You can also use the same mechanism to pay down high-interest debt while continuing to invest and build wealth. The sky really is the limit.
What the Heck is Decentralized Finance?
The simplest way to explain decentralized finance (or DeFi for short) is that it’s just finance, but built to be native to the internet and permissionless.
DeFi wants to make it so you don’t need anyone’s permission to use important financial services, like making a trade or taking out a loan. You can simply use a crypto wallet like Metamask and there are no barriers to entry.
The point is, nobody is really reinventing the wheel here. It’s the same “finance” but built to be as fundamentally accessible and open as the internet itself.
Seriously, who wants to physically go to a bank or wait on hold for hours just to access basic financial services? Oh, and make sure you only try to go during the week, and only between the hours of 9 and 3. Consider arriving early to avoid long wait times.
Already, DeFi services for trading, investing, and borrowing/lending are rivaling their traditional finance (tradfi) counterparts and starting to capture real market share. DefiPulse shows the total value locked in these protocols currently hovering around $79 Billion. That’s nothing to sneeze at, but it’s still chump change compared to tradfi.
It’s clear that this movement is still in its early stages. There are growing pains. Protocol fees and the general user experience present hurdles. Hacks and exploits are commonplace for new and experimental protocols, though these can often be avoided with a small measure of diligence. I recommend using only battle-tested protocols with high existing deposits of at least $1billion).
One thing is certain. The pace of innovation is relentless, and we are starting to see more and more practical services come to the fore. User interfaces of some protocols such as Curve Finance may be less than appealing, but under the hood, these services are fulfilling the promise of DeFi: access to quality financial services for anyone with an internet connection.
This brings me to Abracadabra.
Buying A Condo With Abracadabra
Abracadabra is a Defi service/platform created by Daniele Sesta. The platform manages its own stablecoin — called Magic Internet Money or MIM — to allow users to borrow against a range of approved crypto assets..
Lending platforms like these aren’t new, but where it gets really interesting is the type of collaterals Abracadabra is able to accommodate.
By building on top of existing Defi platforms including Curve.Finance and Convex.Finance, Abracadabra is able to allow users to collateralize yielding assets.
How does that work exactly?
I’m not going to get into the mechanics of liquidity farming here, but let’s try a simple example.
Let’s say you are an investor that wants exposure to BTC, ETH, and Cash — and you want these positions to generate as much yield as possible while you hold them over the long term.
Well, Curve.Finance has the perfect product for you. Tricrypto2 is a yield-generating position that maintains equal exposure to BTC, ETH, and the stablecoin USDT. That means if Bitcoin and Ethereum each fall by 30%, the Tricrypto2 position will only be down 20%, and vice versa. It gives investors some protection against volatility — and generates trading fees in the meantime.
By depositing your Tricrypto2 tokens to Abracadabra, you can continue to earn a yield on your long-term position while simultaneously gaining the ability to borrow up to 90% of the collateral’s value.
Now, a 90% loan to value ratio would be very risky, as the platform will automatically liquidate your position if the price drops more than 10% — effectively closing out the loan and leaving you with just the funds you borrowed. But there’s no need to borrow to the limit, as users can borrow at whatever Loan-to-Value makes them feel most comfortable.
Abracadabra makes it easy to set the exact LTV you want, and even take on additional leverage. (risky!)
The result is a fully flexible, yield generating loan service. From depositing collateral to borrowing dollars takes just a few clicks.
Now that we understand the fundamentals, let’s take a look at what I did. The whole process took just minutes and was performed from the comfort of my home-office computer chair.
Who needs to go to a bank branch anymore? I borrowed $700K from my computer.
Step 1: I deposited funds into Curve’s Tricrypto2 liquidity pool, receiving Tricrypto2 LP tokens in return.
Using the deposit interface for Tricrytpo2 on Curve.fi, you can deposit any amount of the three coins simultaneously.
Step 2: I deposited my Tricrypto2 LP tokens into Abracadabra, which applies the yield-boosting Convex (CVX) wrapper for cvxTricrypto2
Abracadabra uses Convex.Finance in the back-end to apply the cvx wrapper to the tricrypto2 LP tokens to automatically maximize yield.
Step 3: I selected an appropriate LTV of 60% and borrowed $720K against $1.2M in Tricrypto2 collateral
Step 4: I swapped the MIM for the stablecoin USDC
Step 5: I sent the USDC to my CoinbasePro account and converted it to USD at par.
Step 6: I withdrew the USD from CoinbasePro to my BankofAmerica Checking Account (this takes 3 days or approximately 1080xlonger than steps 1–5 combined)
After withdrawing the cash from Coinbase it showed up in my bank account 2.5 days later.
Step 7: I wired the USD from my bank to the seller and closed on my condo in cash.
The Math Behind a Profitable DeFi Loan
Now that the transaction is finished and I have the keys to the property in hand, it’s time to focus on managing the position and repaying the loan. What does this look like? Just how “profitable” is this loan really? Let’s take a look at the numbers.
First off, Abracadabra charges a 0.5% borrow fee up-front that adds $3600 to my outstanding loan balance.
The 0.5% borrow fee is the same for every collateral type on Abracadabra, while the other parameters vary depending on the collateral pledged.
The interest rate on the loan is fixed at 3.5%, which on my borrowed amount of $723,600 (720K + the borrow fee) equates to $25,326/year or $2,110/month.
Unrelated to the loan but still relevant, my HOA fees are $860 per month and property taxes come out to around $1000 per month.
So, my total carrying cost of the loan + home expenses are $3970/month
Meanwhile, the yield on my collateral of $1.2M in Tricrypto2 (necessary for a relatively safe 60% LTV) is ~15% (variable). That works out to $180,000/year or $15,000/month.
The position yield for Tricryopto2 (shown above) is variable. I used a conservative 15% estimate for these calculations.
So, the yield on my collateral pays for the interest on the loan, HOA fees, and property taxes with an additional $11k/month left over*, which I can use to start paying down the loan principal.
It gets better. As I pay down the loan principal, the 3.5% interest charge starts to go down (as the interest is applied on a reducing balance). Very different from the “pay the interest first” methodology that you’d see on any regular home mortgage.
These services are made to work in our best interests, not the board of directors of BofA. Welcome to the new age of financial services.
*note that yield is generally taxed as regular income, so you can slash around 30% or so. Even after that, the income is ~$10k/month.
A Universal Strategy
Now, if you’re not in the market for something as “big” as real estate, you might be wondering: “this sounds cool, but how does it apply to me?”
Well, the point is that this same process and strategy works for practically any significant purchase you might make. Now, you can buy the things you want while remaining invested in crypto, avoiding costly capital gains, and continuing to keep earning yield in DeFi.
Need a new car? A new addition to the house? A new bicycle for Jimmy? You can do it all — unlock the purchasing power of your assets — while continuing to be an investor and generating positive cash flow.
Many people work towards building an investment account for years, only to have to liquidate their holdings to pay for an unexpected expense. A car crash, a hospital bill, having to miss time at work, are all things that all too often can derail even the best-laid investment plans and make it that much harder to get ahead.
But with platforms like Abracadabra and others, now you can hold onto your investments and borrow when you need to. Keep building, keep earning, and stay in the game.
These platforms don’t care where you come from, the color of your skin, what your credit score might be, whether you have an eviction record or even a criminal record. Indeed, they don’t know or care who you are at all. The service is open and accessible to anyone with a crypto wallet.
Wealthy people have been borrowing against their assets — deferring taxes and remaining invested — for generations through accounts and personal brokers at the likes of JP Morgan or Goldman Sachs. Now, anyone can do it, and in a fraction of the time. That’s the real magic behind DeFi.