Does It Make Sense To Pull A Crypto Loan To Pay Off Credit Card Debt?

Yes, it makes absolute sense

If you have a nice stash of crypto, you could use it as collateral to pull a DeFi loan at incredibly attractive rates.

But first, you need to find the right platform.

Most importantly, you have to do your math.

This way a crypto loan might turn out to be the unlikely savior, especially if you are sitting on a credit card debt that is rapidly accruing interest.

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➡What you should know

• You now have a practical way to leverage your crypto so as to pay expensive debt.

• This is known as refinancing. Even in traditional finance, lenders allow borrowers to refinance debt by taking out a new loan at a lower cost to pay off a more expensive loan.

• You can get a crypto loan at much better rates than you would from a bank.

➡Why not just sell your crypto and pay it off?

Good thought, but there are valid reasons why selling Bitcoin or Ethereum should only be considered as a last resort.

☞In some jurisdictions, like the US, you would incur more costs in capital gains tax if you sold your crypto stash. In other words, the moment you sell your crypto, you have created a taxable event.

☞Moreover, there is no reason why you’d want to sell crypto that’s already in profit, when you can take a loan on it for much less.

Confirm that numbers make sense

Running your spreadsheet can be tiresome but it’s a sure way to make an educated decision about your next move.

Doing the math is actually gaming the system.💪 And it’s smart. Wealthy people take loans on their investments all the time because it’s convenient. Also, it’s a sure way to dodge capital gains tax, legally.

Calculate loan to value ratio (LTV)

Whether you should or shouldn’t pull a crypto loan largely depends on your loan to value ratio.

LTV is a metric that allows you to compare the size of the intended loan to the market value of the asset securing the loan.

☞In this case, how much debt do you have vs how much crypto do you have?

Simply put, if you own five times more crypto than you have in credit card debt, then it would be fairly safe to borrow against it on DeFi. You can even pay off half the debt if you don’t have a lot of stack.

☞Another factor to consider is volatility. What is the lowest that BTC could possibly drop, say, in the medium term?

There has been talk that it could dump to $15k. Although this is not probable, it is entirely possible.

☞The next factor is interest. Centralized and decentralized crypto platforms charge different rates.

For instance, Aave (DeFi) will liquidate you at 75% LTV with wBTC.

Let’s say we use $10k as the absolute minimum that Bitcoin could drop. With a 75% LTV, the max you should borrow is $7500 per 1 BTC. This would be mostly safe.

With the current prices (around $35k), a $7500 loan would be 21% LTV.

The safe spot

➡You should keep your loan LTV under 40% and keep some additional USDT, to top up your account, just in case.

➡40% LTV is a good sweet spot as long as you watch it and know that you can pay it down if the market becomes volatile.

👍At this range, you can comfortably take up to 50% drop in BTC price.

Timing is crucial

☛Going by the historical patterns of the crypto market, its best to pull a crypto loan during the first 18 months after Bitcoin halving. This way, volatility will be in your favour as prices will likely be going up.

On the other hand, these loans should be avoided at all costs during or after the peak decline of a parabolic run. This is when the most brutal market correction happens.

☛Remember, if you have quick access to cash, you might not need as much crypto. But as long as your crypto is tied up as collateral, you need to be ready just in case the market moves quickly.

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⏩Next, we discuss the platforms to use for a crypto loan.

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Credits

OnCryptoFIRE, susanking1956, sakirose