Starting with $1 million:
1: $500K Bitcoin in Cold Storage
Put 50% of the portfolio in Bitcoin held on your Trezor hardware wallet. This is your cold storage wallet. This balance should not be touched until you need to buy something and have no alternative means of paying – ideally, this should be in retirement.
2: $250K Bitcoin in Crypto Lending
Invest 25% of your Bitcoin into a crypto lending platform. At $40K, this is 6.25 Bitcoin. Celsius Networks, Nexo, and Voyager Digital will pay 3-6% APR on your holdings.
Your actual APR will be: Celsius: 6.2% APY * .25 BTC+Nexo: 5.25% APY*1.5 BTC+Celsius: 3.05% APY*3.5 BTC + Voyager: 4.75% APY *1 BTC = 3.976% average APY.
Why this particular allocation?
First, most platforms have a bonus rate for a fixed quantity and a much lower rate for the rest. We are maxing out the peak rate before moving on to the next platform. Second, we are decreasing the risk of a total loss event by spreading assets across multiple platforms. Some platforms have higher returns, and some platforms have no rate tiers. However, the security team at Celsius is bigger than the entire staff of most other lending platforms, so it’s my recommended choice for the bulk of your holdings.
Note: Before you take this step, an important consideration for you is Bitcoin’s 164% growth over 10 years. Is it worth risking a total loss for an additional 4% APY? That depends on how long you plan to invest. At 4% APY, it will take about 18 years to double your Bitcoin. If Bitcoin sustains a high growth rate in the meantime, that would make a large difference in the total value. If you only plan to keep lending for 5 years, your lending will only get you about 20% more Bitcoin, so the risk is much higher relative to the return.
3: $150K in Ethereum
While Bitcoin is money, Ethereum is a decentralized smart contract platform. These are different business models, and there is room for both business models in the cryptocurrency space. I don’t believe that Ethereum will ever become money or that Bitcoin will ever become a smart contract platform. (I could be wrong about Bitcoin though because there are already smart contract platforms based on Bitcoin such as Sovryn
While I think Ethereum is the probable winner of the smart contract race, it faces very strong competition from competitors such as Solana, Terra, Polkadot, Polygon, and more. The leaderboard changes day by day, so picking a winner here is risky, and I believe that the current prices of these chains are poor indications of long-term success.
While you’re taking a gamble on Ethereum, place it in Celsius (up to 30 ETH) and Nexo for an additional 6% APY.
4: Invest $50K in DeFi:
We have 10% or $100K left. If you are an enthusiast of a particular project, you can use this portion for more speculative investments. We are going to go with CAKE. CAKE is the platform token of PancakeSwap
, the dominant DeFi platform on the Binance Smart Chain.
CAKE can be staked on PancakeSwap for a 67% APY in the Auto-CAKE pool
. The “auto” part means that the yield on your stake is automatically reinvested.
How does PancakeSwap provide such a high return? It’s essentially a Ponzi scheme: by buying CAKE, you provide capital to PancakeSwap. The yield can only be sustained by continued high growth, so it will inevitably collapse when growth tapers off. However, the exchange itself provides tangible value to users, so hopefully, the price of CAKE itself won’t.
There are many other ways to earn income in DeFi. I just picked one of the easiest. A safer option would be liquidity mining. For example, the APY for CAKE-USDT is 57%. This limits exposure to downturns in the price of CAKE. ETH-USDC is 17% on both Uniswap and PancakeSwap, which is good if you are already holding ETH and USDC.
5: $50K in USDC Lending:
The last $50K is invested in stablecoin lending. One reason to do this is to preserve some dollar-pegged assets to pay taxes on crypto gains. If you’re actively trading crypto and the crypto market falls 80% (as it has), it’s possible to owe more taxes than what your portfolio is worth. Holding back some assets in a dollar-pegged stablecoin provides cash to pay taxes without liquidating your portfolio.
Another reason to hold stablecoins is to pay for everyday expenses and emergencies. If you suddenly need cash, it’s much better to sell your stablecoin than to bet that crypto is not in a recession at that time.
? USDC is a fully reserved dollar-backed stablecoin that is publicly audited, so it’s relatively safe. There are many stablecoins, and some of them have much higher returns than USDC, namely synthetic stablecoins such as TerraUSD and DAI. “Synthetic” stablecoins are decentralized and are not backed by real dollars in a bank account. Instead, they use complex mechanisms to maintain the peg. But there is no free lunch: higher returns denote higher levels of risk. A big enough market crash could cause the peg to fail and the value of a synthetic stablecoin to drop to nothing.
You can currently get 8.5-9% APY on USDC from the major lending platforms.
Total annual income:
- $500K Bitcoin in cold storage: $0
- $250K Bitcoin lent out at 4%: $10K
- $150K Ethereum lent out at 6%: $9
- $50K Auto-CAKE at 67%: $33.5K
- $50K in USDC at 8.5%: $4.25K
Total income: $56,750 per year. Of course, we are betting that Bitcoin and Ethereum will appreciate far more than we are earning.
This portfolio is not meant to be a universal formula. It’s an exercise in thinking about risk versus reward. The safest and simplest option is simply to hold a 100% Bitcoin portfolio in cold storage