Borrow Against Your Crypto? The Elon Musk Strategy Explained

0:00 There's a playbook, the ultra wealthy use that most people never hear about. And when they need cash, they don't sell assets. They borrow against them. Elon Musk is one of the most famous examples of this. And in this video, I'm going to break down how it works, why it works for people like him and what's different here in Australia and whether any of this actually translates to the crypto industry. Okay. Now, before we get into anything, Disclaimer, this is a general education video only. It's not financial advice, not tax advice, not legal advice. All right, so with that out of the way, let's get into it. Okay, so when you need cash and your wealth is tied up in assets, you basically have two options. You can

0:46 sell and get the cash, but you give up that asset and any upside in the future. Selling can also trigger capital gains. And I know we all really hate capital gains tax. So what you can do instead is borrow against those assets. You keep the assets. You pledge it as a security and the lender gives you cash.

1:10 You pay interest on that. And if the asset's value falls too far, the lender can sell it and get their money back. Or you can add more to that asset's value and it stops you from being liquidated. Now, you have to remember that borrowing isn't free money. It's swapping one set of costs and risks for another. So let's have a look at the Elon Musk example here.

1:32 So Musk has taken very little cash salary over the years. Most of his wealth is in the Tesla stocks itself. So how do you fund a life and a few side projects when money is all in shares? And Tesla's public filings show he's pledged a huge amount of Tesla shares as collateral for personal loans. And in most recent reporting, that was roughly around 236 million shares or roughly a third of his holdings. Right. So there are two details that matter here. And let's look at the cap first.

2:09 So the Tesla board caps his borrowing at 25% of the value of the pledge of the shares. Or in this case, it was $ 3. 5 billion or whichever is lower. So for other directors, it was set at 15%. The board says it does this to reduce the risk of forced sales. So even the richest man in the world is kept at a very conservative loan to value ratio.

2:37 And the risk here is quite real because Back in 2011, Tesla's filings openly warned that if the share price dropped, Musk could be forced to add more collateral or sell shares. And in 2022, when he needed cash for the Twitter deal, when he was buying Twitter, now known as X, he sold around $ 15. 5 billion of Tesla shares while the stock was falling hard. So the playbook isn't borrow and never worry.

3:08 It's borrow a small slice against a huge pile with a plan for when things go wrong. Now, there are a few conditions that make this strategy work at the top end. So first off, the very low LTV or loan to value ratio. They borrow a small percentage of what they own. So a big price drop doesn't trigger a margin call. They also borrow cheap. Private banks lend to billionaires at rates that Normal people can only dream of.

3:39 And then the other income and assets that they have, they can pay the interest and top up that collateral without selling. So it's an easy option for the ultra wealthy, ultra rich. Also in the US, there's a strategy with a slight grim nickname. It's called buy, borrow, die. It works in three steps. So first off, you buy the assets like shares or property. and hold them for a long time while they grow in value. Step two, you borrow.

4:12 Instead of selling when you need the cash, you borrow against those assets. Borrowing generally isn't treated as income, so there's no capital gains tax to pay because there's nothing ever being sold. Then third step, die. It's kind of grim. But when you pass away, US tax rules gives you your heirs something called a step up in basis. The cost base of those assets resets to the market value on the day you die. So you don't have a massive capital gains bill that you need to pay. Here's why that matters. Say someone bought shares for $ 1 million and now they're worth $ 50 million. If they sold, they'll pay tax on that $ 49 million gain. But if they borrow against the shares for the rest of their life

5:03 and hold them until they die, their heirs inherit those shares at the new cost basis of $ 50 million. That $ 49 million gain is effectively wiped out. That's absolutely crazy. Their heirs can then sell those shares and pay off the loan with little or no capital gains tax. So over a lifetime, a huge amount of growth may never be taxed as capital gains. That's why it's so popular with the very wealthy in the US. It isn't a loophole for everyone though. Estate tax can still apply on very large estates and interest on those loans has to be still paid along the way. So you take those conditions away and the strategy is completely different. But what about here in Australia? What's different here? The last point

5:51 doesn't translate clearly to Australia. We don't have the same step up rule. Generally, when post capital gains tax assets are inherited here, the beneficiary takes on the original cost base. So you've got to check with your accountant in this type of situation because the details actually matter. So in Australia, borrowing against assets is mainly about timing and keeping exposure, not making the tax disappear like you can in the US.

6:20 And you're paying interest the whole time, which eats into a lot of those benefits. So what about the crypto space? Some crypto holders apply the same idea. You use crypto as collateral and borrow against it. The structure is pretty similar, just the asset is different. Tesla itself is quite a volatile share and crypto is just volatile in general. So if you hold any crypto assets, you know what it's like.

6:46 A 40 to 50% drop in a few months has happened plenty of times. So let's take this example here. $ 100, 000 in crypto and you borrow $ 50, 000. So that will give you a 50% LTV, loan-to-value ratio. That's already doubled the ratio Tesla lets Musk use. Remember, he's got that limit of 25%. So now if your assets drop by 20%, your loan-to-value ratio would then be 62.5%. And if it drops a further 20% by 40% overall, you're already at 83.3%.

7:22 And that's margin call territory. You either need to find more collateral or cash or part of your crypto gets sold, usually right when the prices are low. And that locks in your loss you were trying to avoid by not selling in the first place. There's also counterparty risk. When you borrow against crypto, the provider holds your collateral. And in 2022, we saw what happened with various crypto platforms.

7:47 So who's holding your asset and how really matters. So it's not rich people do this, so you should too. The better question is, do the conditions that make it work for them apply to you? So you have to ask yourself honestly, how much would I borrow compared to what I hold? Am I closer to Elon Musk's 25% or much higher? If my crypto halved next month, could I add more collateral without panic selling? Is the crypto my savings or my safety net? Can I comfortably cover the interest? And what do I actually need the cash for?

8:25 If those answers make you uncomfortable, that's useful information. So that's how crypto-backed lending works in general, and you may find various providers or even decentralized finance options for this. But let's look at real examples of a real product in a structured way. This video is sponsored by Nexo.

8:44 Nexo is a global wealth platform for digital assets, and they have a product called CreditLine. And it's now available to Australian clients through their loyalty program. And here's how it's structured. You use your digital assets as a collateral and you can draw credit against them. It's a revolving line of credit. So you pay it down and you can borrow again. There's no fixed repayment schedule. So you repay on your own timeline. You can use one digital asset as collateral or a mix of several. Rates do depend on your loyalty tier. So check Nexo's website and app for current details, and there is still checks in place before you use it as well. Now, the trade-off.

9:27 Everything we've just covered still applies here. If your collateral's value falls far enough, you may be faced with a margin call, and some of your crypto assets may be sold to cover the loan. You pay interest as long as the credit is outstanding. Your collateral is held by the provider, so there's counterparty risk. And rates and LTV limits can also vary by tier and can change. So it may not suit you if your crypto is your savings.

9:57 If you couldn't add more collateral in a downturn, or if you'll be financially affected by some of your crypto being sold when prices fall. If you want to learn more about how CreditLine works, there's a link in the description to the information page. Nexo is a paid partner, so big thank you for sponsoring and making this type of educational content possible. but whichever provider you look at, the real question is still the same. The playbook is real, but the people who use it borrow small. They have plenty of backup and they have a plan for downsides.

10:31 Understand the mechanics before you consider any of this and speak to your financial advisor, your accountant or licensed professional about your own situation. Now, if you guys found this content useful, I have a lot more Australian-related crypto tax and regulation topics on this channel. So make sure you hit that thumbs up, like, subscribe and notification bell. And I'll keep you guys up to date with everything that's happening in the Australian crypto space. Stay positive, guys, and I'll see you in the next video.