25.4.2024
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“F*&k You Money”. Urban dictionary describes the term as ‘the exact amount of money required in order to tell an individual or organization to go f*&k themselves, without facing repercussions’.
Financial independence, or financial self-sovereignty, is being able to take complete ownership and control of your money, including the self-custody of assets. Having enough money to do whatever you want with your time.
Financial self-sovereignty might seem like a pipe dream or something reserved for the ultra-wealthy. But there are nuances to the concept, and there are different stages on the spectrum of financial self-sovereignty. It’s useful to see it as a journey, or process of empowerment, where you gradually become more empowered over time through knowledge and awareness.
How will you know when you’re financially self-sovereign? Imagine what embodies the opposite of self-sovereignty—a disempowered individual. Confined to a system, with no control. Left to the mercy of external forces. As you progress on your journey, you will find yourself re-evaluating where you are on the scale of self-sovereignty.
Bitcoin has opened the floodgates to a new age where people can claw back control. Instead of operating from a position of powerlessness, people can take control of their finances with a new form of money, free from the shackles of nation-bound, legacy financial systems. One of the most important technological advancements in recent history is the digitization of money—how people can store value. As opposed to traditional currencies with printing presses and central banks; cryptocurrencies like bitcoin are created through computer code.
How does one begin the journey towards financial self-sovereignty? Many people see climbing the career ladder and reaching a six-figure salary as a significant milestone on the ‘road to success’. It makes sense: it’s a nice round number if you can get there.
Others see making their first million as their main goal in life. It’s often said that making your first million is the hardest but that building wealth after that gets easier. Which is somewhat understandable if you consider the compounding effects of earning interest on $1 million!
Increasing your monthly cash flow seems like sound advice and means you could potentially save more over time. But is climbing the corporate ladder to increase your salary the only option? Would you see yourself becoming frustrated by a likely salary ceiling that would be placed on you by your employer? How could you de-risk or diversify the source of your capital?
Creating multiple passive income streams or side hustles is another option. There are countless resources available on the subject and influencers sharing their knowledge online.
But then you realize that the interest rate in your bank, where you’re keeping your hard earned money, isn’t keeping up with inflation. And inflation is eating away at the purchasing power of your money.
What else is there? What do rich people do with their money?
One word.
Assets.
Most of us aren’t really privy to the concept of borrowing against assets that we own. Sure, we understand that when we get a mortgage we put down collateral in the form of a deposit, and that the house itself is used as collateral against the loan. Which is what a mortgage is: a big loan against an asset.
And we’re more than happy to take out this big loan because it’s what everyone does. We’re generally quite content with the fact that paying a mortgage every month is usually cheaper than paying rent. This is no doubt related to the part of the human psyche that prioritizes short-term gratification over long-term gain. Whether or not it’s more economical over the course of a lifetime is another conversation and depends on your life circumstances.
Wealthy people are well aware of the concept of borrowing against assets and are masters of the practice. There’s even a term for it. Buy, Borrow & Die.
How do they do it?
How could you do it?
And, perhaps most importantly—why would you do it?
The basic idea is that rather than selling a long-term appreciating asset, an investor (you) could instead borrow against it.
Wealthy people do this all the time. Let’s say you are significantly invested in the stock market, and depending on where you are in the world, you might have access to (or something similar to) a tool known as a Securities-Backed Line of Credit (SBLOC). This is a lending product that allows you to access a portion of the cash value of your investment portfolio, by using your investments as a form of collateral on the loan, without selling the securities.
The same goes for real estate. Wealthy individuals often use real estate as collateral for low-interest, long-term loans.
This strategy gives you access to cash, while leaving your investment assets to appreciate in value over time. You’re using, or leveraging, your existing assets to build wealth. Borrowing against assets that you own allows you to pay for expenses. More importantly, however, it gives you the ability to reinvest in an asset, such as bitcoin, that returns more than the cost of borrowing. 0% in our case. More on this later…
This is how the ultra-wealthy operate and gradually increase their net worth.
A good way to shift your mindset is to start thinking about your personal finance affairs as if you are running a business. And by starting to use your entire balance sheet (which includes your assets) to fund your spending and investing.
Let’s say you own some bitcoin and will continue to ‘dollar cost average’ (DCA) into it over time. If you hold strongly to the thesis that the price of bitcoin will go up over a long-term time horizon, your main goal is to not sell your assets.
Investing is the act of putting off value today, for the expectation of more value in the future.
However, if you borrow against your assets, you can make use of them today while still having exposure to price appreciation over time.
If you consider the opportunity cost of selling your asset, in this case bitcoin, the notion of borrowing against it starts to make a lot of sense.
But let’s be honest. HODLing is hard. So, it’s crucial to have a means of accessing capital without selling your bitcoin.
If you've been saving your bitcoin for a rainy day and waiting for the price to go up (again), you may not want to sell it just yet. The good news is that there's another way of getting cash from your coins without having to sell them: borrowing against them with Zero.
Borrowing against your bitcoin can be a great way to access funds to buy more bitcoin, instead of having to save up for it! For example, if you have $5,000 worth of bitcoin but believe that in the future its value will increase, then borrowing against it now could give you the ability to buy more and add to your reserve stack, without sacrificing any of your holdings.
Zero is a loan product for a borderless world. It gives anyone, anywhere the ability to access a line of credit against their bitcoin at 0% interest. However, unlike a person borrowing against their investment portfolio or real estate, you aren’t dealing with a large financial institution. You don’t have to hand over your personal details and perform a KYC check or demonstrate a positive credit rating. There is no gatekeeper to deny you access to capital.
The concept of borrowing against an appreciating asset for anything like starting a business, buying a car, or buying more bitcoin, means you still gain exposure to the benefit of any upside price movement on your holdings. Also, because you are borrowing against your own assets, you are your own counterparty, so you don’t have to pay any interest back to yourself. You can also decide on when you want to pay back the line of credit.
Zero is yet another tool in the toolkit that is being built by Sovryn, to allow individuals like you to effectively manage their financial self-sovereignty.
One of the key aspects to understanding how Zero works is something called collateral ratio. Collateral ratio is simply the proportion of collateral deposited compared to the loan amount you borrow. The basic principle works the same as a mortgage or a bank loan. You put down a deposit, or collateral, and you borrow a USD-pegged stablecoin called ZUSD.
There is no middleman when you take out a Zero loan, so you are effectively acting as your own bank. In the case of a major market downturn, to avoid liquidation of the loan (the selling of your collateral to pay back the amount borrowed), you need to maintain a minimum collateral ratio of 110%. This means that for each 1 ZUSD you borrow, you deposit $1.10 worth of bitcoin. It is advisable, however, to maintain a higher collateral ratio, as the price of bitcoin is highly volatile. Once the repayment of your loan is complete, your deposited collateral is then returned to you.
When you place money in a bank, you are effectively surrendering control of it. The same could be said for many centralized crypto wallets which are referred to as “custodial” wallets. The wallets in which you might store some of your funds on some of the biggest crypto exchanges are custodial, meaning you don’t have full control over your funds and you generally have to hand over your personal data to access your funds. This means you’re relying on the effectiveness of the cybersecurity team at these companies to protect your private data. Scam emails or phone calls anyone?
When you use a non-custodial wallet, you are the only person who has access to your funds, which are protected by a private key. Companies that provide custodial wallets store lists of these keys in databases, which can be hacked and used to steal users funds.
For example, if a large centralized exchange goes down or even changes its policies under government pressure, it may lock you out of your account. If it becomes insolvent, you could even lose your coins.
With a non-custodial wallet, this cannot happen—as long as you make sure to safely store or remember your private key. Your money is stored on the blockchain, i.e. not on Sovryn.
At Sovryn, there is no centrally maintained private key database to hack into because we don’t provide custodial wallets for our users. You hold your own assets in your own wallet with your own keys. And, you are also free to access your money whenever you want.
Using Zero to take out a loan against your bitcoin to buy more bitcoin, you maintain control of your private keys. You lock your bitcoin collateral in a smart contract and receive stablecoins. When you take out a DeFi loan against your bitcoin using Zero, you are simply agreeing upfront to a contract on your bitcoin. No one else has access to your bitcoin collateral. Only the person who holds the private key. You.
As the market cap of bitcoin and other cryptocurrencies rises over the long term, so do the benefits of putting your crypto assets to work. Some key takeaway benefits of using a decentralized loan protocol like Zero include:
If you’re looking for a simple way to use the value of your bitcoin in everyday life, or to buy more bitcoin today, this is it!
Now, with the rise of bitcoin and crypto in general, we can see the makings of a new self-sovereign economy where power is distributed, not centralized. You can be financially self-sufficient and therefore free. You no longer need to beat the banks—you can simply become your own bank instead, with your own reserve asset. Bitcoin.
This is not niche. This is personal banking. For you. For everyone.
Learn more about Zero by visiting the Sovryn wiki. Or, if you enjoyed this article, continue reading about Zero on our blog.
Stay Sovryn
