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Using Aave as a DCA tool for ETH or wBTC; a practical guide.

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In some of my last posts I received questions about the use of borrowing money using crypto as collateral (yep, tagging you @dera123). In this post I will cover the basics along with a few general guidelines about how I'm generally using this tool to position better myself in the market.

When investing, bankroll management is everything. Because if you refuse to manage it accordingly, 'opportunity cost' will make a dent in your 'potential earnings' in the future.

Borrowing cash using crypto collateral is a killer app when used right.

  • you can use it as a tool to DCA (as I'll show).
  • to avoid inmediate capital gains (you're not selling).
  • to double down and take a 'synthetic' margin trade without a CEX (not recommended).
  • to amplify staking rewards
  • and probably much more which I'm not aware right now!

In this post I'll cover briefly the first feature. I'm using Aave since it has already been battle tested and I believe it has competitive rates (compared with Compound or MakerDao). Whatever the case this is a personal choice. You just need a platform which allow you to borrow locking in exchange your crypto.

Oh, I almost forgot. Since you're operating on your own you need your own wallet (I recommend securing it with ledger) and the chain where all of this will be done is Optimism (acceptable tx cost without exchanging much decentralization vs BSC or Polygon, I assume ETH as cost prohibitive for most users, the tx fees alone destroy your annual ROI).

First step: Own ETH or wBTC in your own wallet

And that's it, bridge to the required chain.

You can use Binance to directly cash out ETH to optimism, or you use one of the multiple bridges available. Personally I like Connext since I usually bridge using stables and rates are low.

Second: go to Aave and deposit your asset

Go to your dashboard logging in with ur metamask and you'll see a couple of options.

  • 'Supply' means locking your crypto to use as collateral, while (usually) receiving a small APR. This will allow us later to borrow other assets.

In the example from the picture, for locking our ETH we'll be receiving a 0,47% APR, received continuosly

  • 'Borrow' means taking away 'something' from the protocol, you'll be paying an APR for this.

In the example, If we decide to borrow USDC we'll be paying an 1,47% annualized interest on our borrowed USDC. This fee is also 'added' continuosly to our remaining debt.

Third: check numbers and borrow the amount desired

This is where the tricky part starts. Every asset has different liquidation numbers and you should be aware BEFORE taking your loan.

In the case of ETH the numbers are these:

Let's explain briefly the three parameters.

'Max LTV': Represents the maximum 'borrowing power' of a specific collateral. With 80% it means you take take out max 0,8 ETH worth of crypto for every whole ETH deposited (extreme scenario).

'Liquidation Threshold': This is the maximum LTV allowed before the protocol considers your position 'undercollateralized' and start liquidating your position.

'Liquidation Penalty': The fee taken from you when liquidated.

I guess it's better understood with an example.

so let's get to it.

Let's assume ETH is worth 1500$ and I deposit 1 ETH into Aave to borrow some cash.

I deposit 1 ETH (worth 1500$ ), so with a LTV of 80% it means I can borrow a maximum of 1200$ (1500*0,8).

But this is the hipothetical maximum, IRL you want to borrow much less in order to have a 'buffer' in order to resist the volatility of the market without being liquidated.

Ok, so with a collateral of 1 ETH (which is worth 1500$) let's say we borrow 500 USDC.

500 USDC represents a 33% LTV Vs our ETH which is a way more healthy ratio. ETH would have to dump a lot in order to put our position in serious risk of liquidation (would have to dump enough to make that USDC worth 82,5% of our total deposits), so calculating raw would have to dump down to 600-700$.

This, although 'possible', it cannot happen in the blink of an eye, it would happen over the course of a few months (hopefully!) which would give us enough time to manage our debt accordingly (adding more ETH as collateral or repaying the current debt in USDC in order to reduce the LTV and hence the risk of liquidation to a even lower number).

If the liquidation finally happens, a 5% will be taken from the remaining collateral as a penalty fee. It never happened to me and you should never allow this to happen to you. Better to pay off your debt early (at least partially) rather than facing this penalty fee. If you borrow cash for whatever reason, make sure you can monitor this position accordingly.

I usually calculate numbers off the top of my head and I personally try to ensure that in no case debts exceed 50% of LTV. But each on their own.

There are liquidation calculators available in order to help you monitoring your positions.

Fourth: Put your borrowed amount to work for you

Ok, so we borrowed USDC at a variable rate of 1,47% what we can do to make a profit with the minimum risk possible? (wink wink)

Yes, at hive we have a very easy and practical solution: HBD Savings!

With a minimal systemic risk (as HIVE and HBD have been battle tested for quite a while), we can take a loan for 2-3% interest against us, and put it into savings with a +20% APR, making a ~17% net profit just for holding our stablecoin.

Fifth: Action!

Just to show that I put my money where my mouth is (was the origin of the post anywayz). This is how I'm managing this strategy with my brainchild, SEED.

I currently hold 9,2 ETH in this account, which is an amazing long-term hold but which I can liquidate if required to. What I can do? ofc I won't let this sit there. I'm borrowing 5000 USDC, transforming them into HBD and it's now allocated into savings on @seed-cold*

  • I'm currently withdrawing as I believe I might need this cash somewhere ina couple days. If it isn't finally required (probably) will retun here.

Some rough numbers

9,2 ETH (14,3K$) allow me to borrow 5K USDC.
1,46% APY debt is currently being offset by the 0,51% APR from the deposited ETH.

It can change as it's variable but the important fact is that debt is 100% under control and ETH would have to dump -57% down to 660$ in order to face risk of liquidation.

In the meanwhile 5K USDC transformed into 5K HBD generate 1000 HBD/year.

1000/14300 = 0,069 => ~7% APR on our current value of staked ETH.

Conclusions & other considerations

Possibilities are endless if you're a bit creative. @khaleelkazi showed us a while ago how you can leverage this strategy to accumulate as much crypto as possible during a bear market, use a cycle top to cash out some + liquidate the oustanding debt at ATH, and start over again somewhere near the bottom of the next bear market.

You're multiplying your fiat value by orders of magnitude just sticking to this strategy over long periods of time without risking on shitcoins (assuming x5-x10 increases of BTC/ETH between ATL-ATH over 4 year periods).

Other things to note:

  • You aren't necessarily forced to borrow stables, buy not doing this increases the complexity of all the scheme overall. Plan accordingly.
  • This strategy requires monitorisation, so it's not passive at all.

I hope you enjoyed the post.

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