CryptoSlate: leveraged Bitcoin holders can lose money even when price stays flat
In brief
- September's US inflation report showed consumer prices up 3.7% year over year, CryptoSlate noted.
- A 4.26% three-month Treasury yield implied $426 of forgone income on $10,000 over a year.
- A hypothetical leveraged buyer lost 8% of their own capital with Bitcoin flat.
- Bitcoin futures can obscure leverage and hide the financing charge, CryptoSlate said.
The cost of waiting
Rates are the problem. CryptoSlate said high rates make it more expensive to borrow money to buy and hold Bitcoin. It also said Bitcoin reacted immediately to the inflation report (it didn't say which way the price moved).
To size the opportunity cost, the article pointed to the Federal Reserve's interest-rate release, which showed a 4.26% three-month Treasury constant-maturity yield for Oct. 13, the day before the CPI report. At that rate, $10,000 would have returned $426 over a year before taxes. A cash buyer of $10,000 in Bitcoin owes no interest while holding it.
A hypothetical leveraged buyer
Debt changes the math. In a hypothetical example, a second investor puts in $10,000 of their own money, borrows another $10,000 at an illustrative 8% annual rate and buys $20,000 of Bitcoin. If Bitcoin ends the year at the same price, repaying the loan plus $800 in interest leaves $9,200.
That's an 8% loss on their own capital without Bitcoin falling at all.
The cash investor, by contrast, breaks even before fees. In the same scenario the leveraged investor needs a 4% rise just to cover the interest bill, and a 6.13% gain to match the cash investor's illustrative $426 alternative return. Leverage cuts both ways, according to the article: at a 10% price increase the borrower comes out ahead, but at a 10% decline the loss is substantially worse. If Bitcoin falls sharply along the way, a lender can demand more collateral or liquidate the position before any recovery arrives.
Futures hide the bill
CryptoSlate said Bitcoin futures can obscure leverage, making the financing charge less obvious. Dated contracts let traders take exposure at a price agreed today for settlement later.
In a hypothetical, Bitcoin trades at $80,000 spot while a 90-day contract trades at $81,200. That $1,200 premium is 1.5% of spot, or about 6.08% annualized. If spot is still $80,000 at settlement, the long position loses $1,200 per Bitcoin as the contract converges toward spot.
Flat isn't free.
Frequently asked questions
How can a leveraged Bitcoin position lose money if the price doesn't fall?
In CryptoSlate's hypothetical, an investor adds a $10,000 loan at 8% to $10,000 of their own money and buys $20,000 of Bitcoin. If the price is flat after a year, repaying the loan plus $800 interest leaves $9,200, an 8% loss on their own capital.
How much does Bitcoin need to rise to cover borrowing costs in the example?
CryptoSlate's hypothetical says the leveraged investor needs a 4% rise to cover the $800 interest bill and a 6.13% gain to match the cash investor's illustrative $426 alternative return.
How do Bitcoin futures hide financing costs?
CryptoSlate said futures can obscure leverage. In its hypothetical, a 90-day contract at $81,200 against $80,000 spot carries a $1,200 premium, about 6.08% annualized, which a long position loses if spot is unchanged at settlement.
