How to Grow Your Crypto Portfolio with Zero Capital

When it comes to investments and wealth accumulation within the Crypto community, I often hear people talk about the Dollar Cost Average (DCA) method. DCA is where you consistently allocate a small amount of fiat currencies to accumulate assets, over a period of time. For example, John will buy $500 worth of Bitcoin every month, irrespective of the price movements. DCA is an effective tool in bypassing behavioural biases. However, DCA works better in a falling or flat market environment, as the $500 per month will allow you to purchase a greater quantity of BTC. In contrast to a rising market, your $500 DCA investments will buy you ever smaller Satoshi’s.

Figure 1.1 below illustrates portfolio growth using the DCA method over the next 12 months. The final balance will increase to 1.448 BTC or $27,125 (assuming 5% monthly BTC price growth).

Figure 1.1: Portfolio Growth using Dollar Cost Average (DCA)

So then what are we to do in a rising market environment? One option is a Collateralized Reinvestment Plan (CRP), which is to borrow against your existing crypto portfolio. There are obvious benefits:

Fresh capital is NOT required to fund further reinvestment. Cost of capital remains consistent whilst the portfolio value appreciates over time. Leveraged factor amplifies returns (and risk).

At investment or lending maturity, you can liquidate your position and repay the outstanding debt obligation, with a bit of cream on top as profit.

Figure 1.2 below illustrates how a CRP can be more beneficial than simply Hodling or a Trading Strategy.

Figure 1.2: Collateralized Reinvestment Plan (CRP) vs HODL / Trading strategy

Considerations:

• Market Conditions: CRP works better in a bull market.

• Loan To Value (LTV) Ratio: 35% is a prudent level of debt to borrow, especially if market pull-backs occur. Compounding daily interest charge will also diminish the excess LTV ratio over time. Hence, a buffer is recommended.

• Interest rate: 24.9% Annual Percentage Rate (APR), debited daily from your portfolio value (and added to your total debt). However, if debt is repaid using Nexo tokens, the APR is revised down to 8%.

• Margin call: Your portfolio may be liquidated if LTV exceeds a certain threshold*85–90%.

• Maturity: up to 1 year (may be extended). You can repay all or some of your loan early at any time, saving you interest.

• Loan Withdrawal: Withdrawing in USDT (Tether) has zero fees.

•Must have a back-up plan: In the event of a sudden market correction, provision for additional funds is required to top up margin level.

Though there are risks associated with leveraged investments, our assumptions are fairly conservative.

1. Assumed 5% monthly linear growth rate for 12 months, leading up to and after the BTC halving event in May 2020.

2. Downward market corrections will NOT be greater than 60% (margin levels maintained).

Figure 1.3 below illustrates the portfolio growth using a CRP method.

Figure 1.3: Portfolio growth using the Collateralized Reinvestment Plan (CRP) method. Interest 24.9% p/a.

As you can see from the above table, utilising a CRP could grow your portfolio to 1.806 BTC in 12 months, without introducing any new capital. The net (after debt) portfolio valuation or Equity is $22,300. The beauty of the CRP is that it allows your portfolio returns (and risks) to be amplified. This is because you have borrowed additional capital to reinvest. This is highlighted by the Leverage Ratio (column 10). The year end Leverage ratio is 1.52, which suggests that for for every 10% total Return On Capital Employed (ROCE), your portfolio will achieve a Return on equity of 15% (column 11).

CRP or DCA?

• CRP and DCA are not mutually exclusive. Figures 1.4 & 1.5 below illustrates how DCA and CRP can be used together to effectively maximise wealth creation.

• Combined approach provides optionality, which offers greater flexibility and diversification benefits. For example, you may wish to borrow 35% and hold it in USDT, and enter the market during a price correction. Alternatively, you may wish to purchase some Alt-coins or participate in IEO’s by purchasing the respective exchange tokens. The options are there.

• You could also allocate excess capital to other asset classes to reduce portfolio volatility and correlation.

Figure 1.4: Comparison of portfolio valuations betwen DCA, CRP and Hybrid methods

Figure 1.5: Portfolio growth comparison between DCA, CRP & Hybrid methods

How to get started?

After taking into account security, optionality and risk, Nexo Credit Line is the most viable option for a CRP. A close second option is the Binance Margin Lending service.

We skipped on Binance for two reasons:

1. Lack of optionality — You can only select a handful of assets to trade within the Margin account and hence, the options are limited. Nexo in contrast allows withdrawal of funds to any wallet for any reason that the borrower sees fit.

2. The cost of capital is also fixed on Binance and varies depending on the borrowed asset. A good idea for Binance would be to copy the Nexo model and reduce the cost of capital by HODLing and repaying using BNB tokens (Binance native exchange currency).

Benefits of Nexo

• Nexo loans doesn’t require a credit check. Simply deposit your assets and withdraw the funds in USDT instantly. You can transfer your loan to virtually any wallet of your choice.

• No minimum repayments or hidden fees.

• Further opportunities to reduce the cost of capital via Nexo token dividend distribution plan and potential token appreciation, which will be discussed in a subsequent article.

• Multi-asset Nexo wallet is secure and fully insured.

• No early repayment penalties

Nexo Drawbacks

• Nexo charges *24.9% annually. However, this can be reduced to 8% APR if paid with Nexo tokens (we have based our above calculations on 24.9% APR). Secured lending rates of 24.9% APR is extremely unfair and an absolute raw deal, considering that it is secured against the borrowers capital. It can be argued however, that if the borrower repays the loan with Nexo tokens, the APR is reduced to 8%. The counter argument can also be made: if the borrower is short on funds and unable to acquire Nexo tokens, they may have to liquidate their portfolio and pay the full 24.9% rate.

• 1 year loan maturity however, you may be able to extend the term. More details on loan terms can be found here: https://nexo.io/loan-terms

Final Verdict

We have explored potential portfolio growth models using DCA and CRP methods. And although DCA is a proven approach to accumulating wealth over the long-term, it’s not very efficient in rising market conditions.

CRP on the other hand works great in a bull market, as it allows you to bring forward your crypto acquisitions and lock in a lower price today; prior to major market movements. Therefore, it allows greater timing opportunities. Furthermore, it doesn’t put pressure on your cash-flow and lifestyle.

The combined DCA & CRP methods highlighted above can maximise wealth creation by providing diversification and optionality benefits. Used effectively, one can capitalize on it, if we are indeed headed for the moon within the next 12–36 months.