Nexo: Making More Money In A Volatile Bull Market By Overleveraging
By: Thomas Dylan Daniel
Tags: Defi, Blockchain, Cryptocurrency, Finance, Life

CRYPTOCURRENCY

Nexo: Making More Money In A Volatile Bull Market By Overleveraging

The fascinating thing about blockchain finance is that relatively small amounts of money, when invested wisely, can rapidly become much larger — outpacing even the bull market itself.

Photo by Dylan Gillis on Unsplash

We read a lot about DeFi volumes and so on these days, but there aren’t many articles explaining how to make money with retail solutions anyone can operate. Let’s do our part to remedy that situation by looking at what Nexo is and exploring a few scenarios in which we might stand to make a remarkable return under current conditions, if the bull market holds.

The fascinating thing about blockchain finance is that relatively small amounts of money invested wisely can rapidly become much larger — outpacing even the bull market itself. Using Nexo’s leveraging option and the techniques we’ll be going over in this article, I’ve made about $700 by investing $1000 into Bitcoin, Ethereum, and Nexo back when the Bitcoin price was about $13,000. You may notice that the return is 70%, while BTC prices are only up about $5500/$13000 or 42%. The numbers are a bit weird because I’ve been spending some of the returns by sending USD from Coinbase to Venmo and then swiping my Venmo card, but the general point is simple enough to understand: Nexo lets us take loans out using cryptocurrency as collateral, and if we time our plays for periods when crypto is increasing in value or bull markets, we’re able to massively increase our exposure to the rising prices in a most remarkable way.

My play has been largely to invest the loan money from Nexo back into Bitcoin and into another token called Zilliqa, which pays a return of 20% currently via Atomic Wallet and which is up >50% since I bought it, so that’s where a decent chunk of my returns have come from: I have a position independent of Nexo that I’m funding with the leverage I get from my Bitcoin and Ether in my Nexo wallet. I’ve put almost $400 of my leverage from the Nexo position into ZIL and it’s worth almost $700 currently — so it’s become a sizeable chunk of my little DeFi portfolio. In a liquidation event, say BTC flicked down to $1 for a few minutes, Nexo will sell off my assets to attempt to recoup its investment (the loan), so it’s nice to have that in a separate wallet.

The risk of an unexpected event wiping out leveraged crypto positions is always nonzero, but my initial cost, $1000, was about as much as the token I’ve purchased with the return from this investment, meaning I’ve paid myself back for making this investment in the first place already! I am beyond thrilled with this result, and have been adapting my strategy on the fly to accommodate both my financial needs and the effort to continue to ensure that I maximize any possible benefit from the contemporary bull market.

In fact, I’ve spent about $300 I pulled out of Nexo, so between that and the approximately $700 ZIL position, the initial cost of the investment that got this portfolio started has already been repaid. Now, let me walk you through how I made that happen and why I plan to pursue this strategy to the greatest extent of my ability during the present bull market. There’s no hedge like paying yourself back for the initial cost of a position with profit from that position! I know it sure opens my eyes a bit toward risky plays I wouldn’t even consider under other circumstances.

Nexo’s Innovation

Nexo’s primary innovation is an easy-to-use consumer-facing application that allows retail investors to borrow cash in the form of stablecoins against their positions in the crypto markets. Assets such as Bitcoin can be deposited into the Nexo cryptocurrency wallet and users have the option to choose a variable APR return, paid in whichever cryptocurrency has earned the interest or in NEXO tokens. The other option a Nexo user has involves taking out a loan against the cryptocurrency assets that were put up as collateral. It took me a few weeks of consistent meditation to understand how this allows an investor to rapidly grow a comparatively small amount of money into a fortune, provided a bull market is at hand. Consistent asset appreciation is the cornerstone of the basic DeFi leverage play. It’s basically a manually executed margin trading framework. We’re just looking at the mechanics for this section.

The application will allow you to withdraw USDC to a wallet you control, although they say there is a debit card on the way, I still haven’t been invited to get one yet, but that’s okay with me! It’s far better to withdraw in cryptocurrency anyway. USDC form makes it easy to send your crypto to an exchange and buy another asset with it, possibly more of BTC if you’re just trying to accumulate as much of that as possible!

Now, going through this process isn’t margin trading, it’s just credit based on digital collateral. So you can send your money back to Nexo and take out another loan, if you like. The mathematics of the loan and whatever Nexo’s risk algorithm does basically determine the amount they’re willing to give you in USDC against whichever cryptocurrency asset you deposit, but beware: your crypto will be locked in your Nexo wallet in a smart contract which will seize your assets if the price drops and you haven’t paid back your loan. So you’ll want to watch it or keep the assets you buy with your leverage loan outside of the Nexo wallet for a bit of security against the possibility of a sudden drop liquidating part of your position without your knowledge.

How To Apply This

There are a few different options here. We can take the leveraged cash out of the position to pay back the cost of our initial investment, or we can let it ride. We can sell some of the asset to close the position at any time, but whatever is sold will no longer appreciate, so we want to wait as long as possible to exercise this option. Finally, once we’ve decided to take the loan and put it somewhere, we can choose to buy more of the initial asset or, my personal favorite, buy a different asset capable of appreciating, at least in the short term, more than BTC or ETH!

Taking the cash out of the position seems like a boring option, but it can be an absolute lifesaver if you’re a broke dude like me putting everything into these markets because you don’t have much anyway and if it works out you’ll be able to pay off your student loans and maybe travel some. It’s just a way to keep enjoying the appreciation the markets are putting out without having to permanently close your position, which would eliminate your exposure to appreciating digital assets.

The good news with this option is that we can keep track of our results by paying back our initial investment, right back into the checking account where the money started out. If pull this move off, we still hold an appreciating asset at the end.

If the initial investment goes up by 3x, we end up with a loan equal to about 1.5x our initial position’s value, withdrawals taken that equal 1.5x the initial position’s value, and an unleveraged, zero-cost cryptocurrency position of about 3x the initial position’s value. So the initial position is paid off and we have 3x the money we initially had — and even if we let it ride and it doubles again, we again end up with the same money we would have had if we simply put our initial investment in and it appreciated 6x.

This method is fine, but it just ends up charging you a bit of interest to cash out your position early. Nothing wrong with that, but it’s possible to squeeze more out of this machinery. How much more? Well, as it turns out, as much more as you like, as long as the bull run continues.

Reinvesting profits into the same position will allow the user to increase exposure to the asset almost ad infinitum, or at least until the $10 minimum for a Nexo withdrawal comes into play. What this essentially means is that, with a sufficiently large investment, it is possible to more than double initial exposure to a given asset. You pay for one BTC, Nexo pays for one, and if the price doubles, you sell four and take home 3x your initial investment. That’s right, you’ve compounded your return and doubled it.

This isn’t a bad way to handle a patently bullish situation. The risk of some of your crypto assets being liquidated is substantial, but Nexo liquidates progressively by selling a bit of your crypto as the price dips, so in some sense this is a mechanism that serves to arbitrage the markets against massive downward price fluctuation and if you’re a BTC supporter you’ll be glad to know you’re helping, but that risk of liquidation is a bit scary to some of us, which brings us to the innovation I’ve developed that has helped me to increase my returns even more: I hold some XRP, some ETH, and some NEXO tokens in my Nexo wallet. You can only leverage 30–40% against some of these assets, but that’s good in a squeeze because the lower threshold reduces your chance of liquidation by simply having a bit more cash in the portfolio.

Reinvesting profits into a new, higher-risk position can increase your returns even more. I bought Zilliqa (ZIL) with some of the money I received by putting my BTC and ETH up as collateral, and the price has increased by over 50% since the purchase! That’s right, I managed to get into a small cap that was about to take off right on time and have made more money by being in ZIL via Atomic Wallet, staked at 20% by the way, than I would have made by reinvesting into BTC and ETH. I plan to only do this until my cost has been completely transferred out of Nexo, but that won’t be for awhile yet because I’ve increased my investment during the Thanksgiving Dip.

The reason I’m being so cautious is that I am a new investor and have little or no idea what I’m doing, formally. I’m just making it up as I go along and writing up the things that seem to work in case someone comes up with a problem and helps me fix a bug that might have cost me money! The one goal here, for me, is to find the best way of creating the highest return possible in this bull market.

Conclusions

The strategy is this simple, folks: invest an amount of money you can afford to lose into Bitcoin, Ethereum, or Ripple and then send it on over to Nexo wallet. There are some benefits to getting Nexo tokens to go along with your investments that you might like to look into. Then sit back and watch for a minute. Pick out a watch list and figure out which assets have the most potential as technologies, then leverage out of your Nexo position and into an asset with a smaller market cap and thus more potential to appreciate by multiples.

By the way, I’m explaining this in the second person to make it easier to understand, not to encourage anyone to actually do anything. This piece should be read with an “if you did, this is how” and not a “you should” tone. I have most of my holdings in other, less risky ventures and the reason why is that I don’t want to lose all of my money if I miss something in this complex and fascinating space. Things are going very well for now and I have no complaints, but the last thing I want to do is misrepresent the risk and the difficulty of doing what I’m explaining how to do in this article.

I am so cautious I like to hedge my bet by holding some interest-bearing assets such as ZIL, which I buy with Nexo leverage, in the Atomic wallet. The goal is to pick something that will appreciate on its own and hold it outside of the Nexo wallet to keep it from being exposed to the risk of liquidation. Once you’ve done this enough to recoup your initial cost, feel free to sell this asset and put the money where it needs to go in your life — you’ve zeroed the cost of your Nexo Wallet experiment. If you judged correctly and your asset appreciated, congratulations! You don’t have to use as much of your initial BTC leverage to push your cost down to nothing.

When you’ve managed to get your cost to nil, feel free to spend your time overleveraging your exposure to the major assets on the market as much as possible. As the price goes up, you can continue to accumulate more or less indefinitely. Just remember to sell before it goes back down to keep from having it all sold off. My plan is to see the peak and leverage against it, but hold the USDC for the last 1/3 of the ascent or thereabouts. That way, I’ll be able to comfortably aim for 85–90% of peak when I make my move out, and I’m slightly closer to whole than if I aimed for the very top and missed. This little exit strategy aside, I’m not sure when it’ll look like a peak to me. I’m hard long for the foreseeable future, but I want my plan to benefit me even if that massive price hike isn’t as practical as it seems.

The thing about having a plan that works if an asset can 2x or 3x and you are able to identify that trend and get into the right position is that it works out to an extraordinary return if the asset bounces 2–300x or more. I’m certain someone can run the numbers on that but I don’t even want to. My drawings are very messy, but the general rule is that if the BTC price doubles, the amount of the loan can double as well, so going from 10k to 20k per BTC for example will enable the overleverager to purchase one half of 1BTC ($20k-$10k already borrowed = ½BTC @ $20k) for a total holding of 2.5BTC. This compounds the initial investment such that the next purchase is .75BTC after the price hits $40k, then 1BTC after the price reaches $80K.

By the time our hypothetical and standard baseline investment has 10x’ed, we’re sitting on a $150k loan and 3.45BTC worth a whopping $345k! That’s a $195k return on our initial $10,000 investment, nearly double the return we could have enjoyed by investing and forgetting about it.

I hope this article didn’t bore you with details. It just really seemed like someone should sit down and do some of the math on this to explain to everyone why DeFi is such an exciting development in the world of financial technology. It really does change everything. My point in writing this article is that explanation, not financial advice. I’m not qualified or willing to tell anyone what to do with their money, but I am convinced that cryptocurrency is changing everything about how we live our lives and structure our societies far more rapidly than we generally give it credit for.