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Podcast 🎤 #26 The Crypto Snowball Farming Strategy

Today I’m breaking down my 2022 crypto strategy and how you can leverage the value already locked up in your crypto wallet to generate income and dollar cost average into even more crypto.

Introduction

Imagine being a real estate investor, buying your first property and then just letting it sit there collecting dust. Sure, the property may appreciate in value but you’d also rent it out right!?

The same thing is happening with your dusty stack of crypto. We can’t sit around waiting for the blow off top, or the singularity before we start putting these assets to work.

If you’ve listened to earlier episodes of the podcast, you know dollar-cost-averaging is the cornerstone of building a strong position at a good price. DCAing along with buying dips is the beginning of your snowball, but now it’s time to push your snowball down hill.

A Simple Snowball Farm

The idea behind a snowball farm is simple really:

  1. Start with some crypto assets like BTC, ETH, LUNA & stable coins
  2. Borrow a safe amount of stable coins against your crypto assets
  3. Lend the stablecoins to generate interest, typically in the form of reward tokens
  4. Farm and swap the rewards for more rewards, assets and stable coins
  5. Now with more assets you can borrow more, lend more and dollar cost average into even more crypto assets

Unlike carving off a slice of your paycheck each month, the interest your earn in your snowball farm accumulates daily. Its the ultimate DCA strategy! And you can pair this with your traditional fiat DCA method to supercharge your growth.

Borrowing Against Crypto Assets

Borrowing and lending is an important component of the strategy to familiarize yourself with. When borrowing, it’s important to keep an eye both on the costs but even more importantly your Loan To Value ratio (LTV).

We discuss LTV in great detail in the Never Sell Strategy, but in a nutshell we only borrow enough to ensure that when crypto prices fluctuate, our lender never has to sell our collateral to pay our loan.

To determine a safe LTV:

  1. Pull up charts of BTC & ETH
  2. Add support lines and 50/200 day and 50 week moving averages
  3. Note prices the asset plunged to in past sell offs
  4. Use past performance and the lines on your chart to determine a safe price which you can’t imagine the asset plunging to over night

Yield Farming Math

Right now, I believe you can safely borrow roughly 40% loan-to-value (LTV) against your crypto assets. To reach this number, I determined ETH’s safe price is 1,500 and the current price is 3,800 so 1500/3800=40% LTV. BTC’s safe price is 20,000 and the current price is 48,000 so 20000/48000=40% LTV. Interesting that they’re both the same…

So for every $1k of crypto assets you can safely borrow $400 of stable coins. My favorite place for borrowing are:

  • BTC – Bitcoin is the trickiest to borrow against since you can’t natively do so in DeFi. For BTC you might want to use a custodian like Nexo though the costs are quite high at ~7%.
  • ETH – Ethereum has tons of low price borrowing options. The most popular is MakerDao via their Oasis dApp but newer (and riskier) options like Abracadabra’s wETH pool charge 0% with a small 0.5% borrow fee.
  • LUNA – Terra’s Anchor Borrow allows you to borrow UST against your LUNA at (currently) 1.69% and then durn around and drop it in Anchor Earn to make ~20%.

The high costs and complexity of borrowing against BTC makes it less desirable for borrowing against. A topic for another day, but something interesting to consider. We’re keeping an eye on Sovryn’s Zero project with the hope that it becomes a good place for borrowing against BTC for free.

Lending Stable Coins

Once you’ve borrowed $400 in stable coins for every $1k it’s time to put those stable coins to work earning interest. We do this through lending, and only lending! We don’t want to play with volatile assets or illiquid investments in our Snowball Farm for a few reasons:

  • If the price of our collateral drops, we may need to pay down a portion of our loan so we want to maintain liquidity.
  • We don’t want to lose any money. The amount we can earn may fluctuate, but the amount we borrowed will stay stable.

My two favorite places for lending stable coins are:

  1. Curve + Convex – We discuss this strategy in great detail in our episode about Farming Stable Coins, but in a nutshell we provide liquidity to the Curve exchange and harvest the rewards with Convex.
  2. Anchor Earn – Again, Anchor Earn provides such a simple/stable ~20% that it’s created sort of a benchmark for yield farming stable coins. If a strategy you’re evaluating doesn’t make 20%, drop your stables in Anchor instead.

Time To Snowball

So if you borrow $400 of stable coins against every $1k of crypto assets to earn 20% that equates to 8% APR on your crypto! (400*20%=80 , 80/1000=8%) That’s a lot, but it doesn’t even take into account that you also still hodl your crypto, which is appreciating! And as it appreciates, you can borrow more to farm more.

We call it a Snowball Farm because it takes some tending. You need to harvest your crops (interest & rewards tokens) and do something with them. Typically monthly, we harvest the rewards from our Snowball Farm and re-allocate them in one of three ways:

  1. Pay Yourself – If you want to generate income for living off your crypto, you better pay yourself first.
  2. Re-Stake Rewards – When using Curve + Convex for example, you’ll earn CRV and CVX rewards. If you want to invest and speculate on the growth of the Curve ecosystem, you can re-stake these reward tokens to snowball them even further.
  3. DCA Into More Crypto – This is why we’re here! Leveraging your crypto assets to safely acquire more crypto assets.

Which option(s) you choose and the proportions you allocate will all depend on your personal goals and risk profile. However, the first option of paying yourself is #1 for a reason. This quote from a book I read as a kid and it always stuck with me:

“A part of all you earn is yours to keep. It should be not less than a tenth no matter how little you earn. It can be as much more as you can afford.“ – The Richest Man In Babylon

Never forget why we’re here. Snowball Farming is an excellent way to grow your assets, however we’re doing that to improve our lives! Taking a little off the top every now and again is a great use of your new Snowball Farm.

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