Planting Coins: fourth report (and Lombard loans)

Management Summary 

• Today's focus is on the significant price recovery of cryptocurrencies in January and its impact on our crypto garden. 
• In the middle of the crypto winter, it is still important to be cautious about further contagion from CeFi players such as Grayscale/DCG. However, the constantly pessimistic sentiment on social media can also be used as a counter-indicator to perhaps already discover the first heralds of spring.  
• In the technical section today, we would like to present the possibilities of a Lombard loan, i.e. a loan against the crypto portfolio.   

What is the crypto investing series?  

This blog post is the fifth report since the initiation of our crypto portfolio, and the sixth part of our crypto investing series Planting Coins. Read more about our crypto portfolio framework here. Don't forget to sign up for our newsletter to get the next reporting straight in your mailbox!

Lombard loans to get more out of your portfolio  

Many investors who view crypto assets primarily as a long-term investment or even as a store of value can take advantage of a Lombard loan, for example, to cover ongoing everyday consumption costs without having to sell the crypto assets. Moreover, the Lombard loan liquidity can be used to either further diversify your crypto portfolio or to hedge your portfolio against price declines.  

A Lombard loan is a secured loan that allows one to use their cryptocurrency portfolio as collateral to obtain a fiat currency loan. On the following lines, we will highlight the advantages, disadvantages, opportunities and risks of using a Lombard loan for your cryptocurrency portfolio. 

Significant advantages through collateralization

Generic advantages

• Access to cash: A Lombard loan gives you quick access to cash when you need it without having to sell your cryptocurrencies. 
• Retention of ownership: You can retain ownership of your crypto portfolio and benefit from potential price increases during the loan term. 
• Low interest rates: Lombard loans typically have lower interest rates than unsecured loans, although interest rates tend to be significantly higher for digital assets than for traditional financial instruments due to the more complex risk management involved.  

Specific advantages 

• Increase liquidity and leverage: a Lombard loan can provide you with additional liquidity to invest in new opportunities in the crypto market. 
• Portfolio diversification: You can use the loan to diversify your portfolio by investing in other cryptocurrencies. 
• Hedging strategy: A Lombard loan can be used as a hedging strategy against possible price declines in your crypto portfolio by using the liquidity to buy futures or options as a hedge.  

Every upside also comes with downsides 

• Risk of forfeiture: If you fail to repay the loan, your collateral will be confiscated and realised by the lender. 

• Limited loan amount: The loan amount you receive will be limited by the market value of your crypto portfolio. 
• Interest payments: You will have to make interest payments on the loan, which costs can add up over time. 

What are the key risks to keep in mind? 

• Market volatility: the value of your cryptocurrency portfolio can fall quickly, affecting the value of the collateral and your ability to repay the loan. 
• Credit risk: You may default on the loan if you are unable to make the interest payments or repay the loan in full. 

In summary, a Lombard loan can be a useful financial tool for crypto investors who need quick access to cash while retaining ownership of their investment, or who wish to further diversify or hedge their crypto portfolio. However, it is important to carefully weigh the advantages, disadvantages, opportunities and risks before taking out a Lombard loan for your cryptocurrency portfolio. As with any financial decision, we at Kaleido are available to help you determine if a Lombard loan is right for you.  

First heralds of spring? 

The portfolio was launched on November 2, 2022 at 7 p.m. CET, just before the events surrounding the FTX crypto exchange. The data of this report is as per February 1, 2023 at 7am. CET. 

Figure 1: A positive start into 2023. 

After three months, the portfolio shows a positive performance of +21.9%, compared to -18.7% on 20 December 2022. This corresponds to an increase in value of over 40% in just under six weeks.  

The developments can be attributed to a generally positive market sentiment in January, even though contagion risks still exist, particularly in the CeFi area around the Digital Currency Group DCG conglomerate. 

Figure 2: All coins contributing positively.

The main contributor in terms of performance was Solana, which also lost disproportionately in value in the wake of the FTX bankruptcy. Overall, all contributions are positive, even though we are practically back in field 1 with Chainlink.  

Figure 3: Six cryptos are staked generating cashflows… 

The staking rewards of the 6 staked coins are also relatively constant and contribute a gross return of between 2.55% and 13.89%. 

Staking rates are calculated on an annual basis based on the effectively realized staking rewards on a daily basis. Thus, they vary on a daily basis, but give an approximate indication of what to expect. 

Figure 4: …contributing already 1.4% of performance to the portfolio 

Of course, the staking rates have to be put into perspective with inflation, but in today's view it is first about how much the decision against staking would cost our portfolio. As figure 4 shows, we could already achieve 1.4% performance with the decision to stake the six currencies.   

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