Double Your Bitcoin with Zero

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October 24, 2022

Everyone wants more bitcoin. The challenge is how to get it. You may be ready to add to your bitcoin holdings, not to trade but simply to HODL. But your present stash is limited. What are your options? 

Zero may be one of your best options to acquire more bitcoin: it allows you to borrow a dollar stablecoin ZUSD at 0%. Using this loan you can acquire more bitcoin. Before considering this in detail, let’s consider two alternatives.

Alternatives to Zero

One way to get more bitcoin is by margin trading. Unlike most margin trading platforms, Sovryn margin trading allows you to use your bitcoin as collateral. Margin trading allows you to use collateral to take a leveraged position—essentially a larger bitcoin position. Behind the scenes, the system borrows against your bitcoin to purchase more bitcoin. This allows you to control more bitcoin than you own outright. 

Margin trading has two significant drawbacks if your goal is to HODL. First, you will pay interest on the internal loan that was made to purchase the extra bitcoin. The interest rate could be several percent APY. This means your HODLing— which is long-term by definition—will cause your extra bitcoin position to gradually diminish over time. Second, depending on your tax jurisdiction, you will face a taxable event when you unwind the position and will generally owe taxes on any gains you made.

Another way to get exposure to more bitcoin is to take a long perpetual futures position. With perpetual futures, you are not actually acquiring more bitcoin. Rather, you are taking a virtual position on bitcoin that pays you if the price moves in your favor and charges you if it moves against you. The end result is the same gain or loss as if you held the bitcoin.

This method has two drawbacks. The first is that you will likely pay a continual funding fee to shorts similar to interest for holding a long position, since longs are generally more desirable than shorts. The funding rate can amount to 12% APY, which directly drains your collateral, especially in a long-term sideways market. Second, like margin trades, gains and losses are tax events as soon as the position is closed.

Using Zero to Buy More Bitcoin

Zero is designed to issue you a loan in ZUSD stablecoins backed by your existing bitcoin collateral (RBTC). You must maintain a collateral ratio of at least 110% and preferably 150% or more. Even though the loan is issued in ZUSD, you can use your newly minted ZUSD to turn around and buy more bitcoin. You pay a small origination fee—as low as 0.5% of the loan—but no interest.

Zero has distinct advantages over margin trading and perpetual futures trading to HODL a larger position. You pay an up-front origination fee of around 0.5%, but you pay nothing after that. There is no interest or funding fee constantly draining away your funds. Also, there is no tax event as long as you HODL. If you pay off the loan with new funds, there is never a tax event. If you sell just enough RBTC to pay off the loan, you only pay taxes on the gains on the portion you sell. If the price goes up significantly, this could be a significant tax advantage over other methods.

A single Zero borrow+buy allows you to increase your bitcoin holding, but it doesn’t let you double your holding due to the collateral requirement. You can double your position, but it requires two steps of borrowing and buying. 

Here’s how to do it:

1. Use Zero to borrow ZUSD: If you have B RBTC that you want to double and the current RBTC price is P, then borrow Z ZUSD according to the formula:

Z = 0.6*B*P

2. Convert ZUSD to XUSD using the Convert pane in the Zero UI.

3. Go to the swap page on the dapp, and swap the XUSD for RBTC.

4. On the Zero page, in the Line of Credit pane, adjust the RBTC collateral to include the newly purchased RBTC. The total collateral should be the original plus the newly purchased RBTC, which should be almost 1.6*B.

5. Adjust the total Borrow amount to:

Z = 1.01*B*P

This will issue more ZUSD, about 0.41*B*P. The 1.01 in the formula above allows minting of 1% more ZUSD than the original collateral value B*P to cover the Zero loan origination fee plus slippage when swapping for RBTC.

6. Convert the new ZUSD to XUSD.

7. Go to the swap page on the dapp, and swap the XUSD for RBTC.

8. On the Zero page, in the Line of Credit pane, adjust the RBTC collateral to include the newly purchased amount. The result should be approximately 2*B. This step is important because it increases your collateral ratio and provides further protection against liquidation or redemption against your Line of Credit.

Your final RBTC position should be approximately double the original, and your collateral ratio should be around 198%.

Final Thoughts

If you'd like to think through the market risks of a 200% collateral ratio, you might want to check out “Catching a Falling Knife: Zero Collateral Ratio and Stability Pool Decisions”.

Enjoy your double HODL!

Stay Sovryn

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