Not long ago Michael Saylor has started publicly investing in bitcoin; in an interview he referred to the method of taking out loans against BTC rather than selling them. He made the example of wealthy families who have owned land in Manhattan for generations; these families take out loans against the properties. The loans are untaxed and since the price of the properties keep rising, can be paid without losing the properties. Sounds nice. Since his interview (and maybe even before) bitcoiners here and elsewhere have agreed with Saylor to do the same thing with their BTC.
In my view, that's a bad idea. Here's why.
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Counterparty risk. If you deposit your BTC with Celsius or some other lender as collateral, you no longer hold the keys. The lender might get hacked or otherwise go belly-up, and you'll be out of your collateral. Whether this is an acceptable risk is a personal matter.
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The strategy is based on the assumption that BTC will keep rising in value. (If BTC does not rise in value, then the loan will come due, with interest, and the collateral may not suffice to cover both, making the loan a very bad investment.). The second risk is thus - what if the 2021 rise is bitcoin's last bubble?
It think this might be the last bubble. Over a year ago, someone else made the argument that there is only room for one more bubble. While that post is worth reading, here's why I think there's little room left to grow after this bubble.
Let's assume that the top of the current bull market/bubble is at $150,000. Not unreasonable. That gives a market cap of $2.25 trillion (assuming only 15 million BTC in circulation). That puts BTC at around 20% of the gold market cap. That would make bitcoin a major player.
A following bubble (maybe sometime around 2024), which increases the price by, e.g. 10x (i.e. to 1.5 million per BTC) would put us at a whopping $22.5 trillion market cap. That's two thirds of the S&P 500. It's nearly half of all the US stock market. It would exceed M2 money supply.
So much for comparisons. None of this means that bitcoin cannot reach such lofty heights, especially in a globalized economy. It's possible, maybe even probable. However, I think it will become increasingly unlikely, and it is certainly not inevitable. Government and institutional resistance is likely to grow exponentially. While governments cannot regulate bitcoin itself, they can regulate bitcoin's interactions with their economies. China, for instance, limits the amount of Remninbi a person can convert to US$ to $50,000. Is it inconceivable that governments will limit the amount of BTC that can be exchanged for fiat, or for goods and services per person? Especially if prompted to do so from powerful lobbying interests?
Time will tell. I could be wrong, which is why I post this here. I'm curious about your thoughts.
Personally, I would plan to cash out whenever you think this bubble has reached its top (though keep some BTC just in case). That's what I plan to do with my (very modest) BTC holdings. Simply put - for my risk tolerance - the combined risks of counterparty failure leading to a loss of BTC together with the possibility of this being the last bubble means that paying capital gains taxes is more acceptable than carrying those risks.
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