How to use Money-on-Chain’s BitPro Token to generate a passive income from your Bitcoins
We already wrote about Money-on-Chain’s stable coin, the Dollar-on-Chain, in issue #3. Now we will have a closer look at the BitPro, which is another important token of the Money-on-Chain system. The Dollar-on-Chain (DoC) is backed by Bitcoin, which means: Bitcoin owners need to add some Bitcoins as collateral to the protocol, otherwise no DoCs can be issued. Logically, they need to be compensated for this.
This is the function of the BitPro. It generates a passive income for Bitcoin owners who invest their Bitcoins in the Money-on-Chain system. In 2020, BitPro owners made a profit of 20% compared to hodling their Bitcoins. From March 2020 to March 2021 the profit even increased to 25%. – not bad for a low-risk investment! Bitcoin, BitPro and DoC are closely connected. The more Bitcoins are locked into the system, the more BitPro tokens can be issued and the more DoCs are available.
These are BitPros’ three streams of income:
- A small leverage on the Bitcoin price
- A share of the interest which traders pay for
the third token of the system, the BTCx
- A share of the fees which are charged for
minting DoCs, BitPro and BTCx
A Small Leverage on Bitcoin
Leverage means: when the Bitcoin price rises, the BitPro rises even more. The leverage depends on several factors, such as the demand for DoC and BTCx, and the rise and fall of the Bitcoin price. In the past it was usually between 1 and 1.25. With a leverage of 1.2, the BitPro rises by 120 US dollars if the Bitcoin price goes up by 100 US dollars.
Since October 2020, the price of Bitcoin has increased from 10,700 USD to a peak of around 58,000 USD on February 21st. In the same time, the price of BitPro went up from 11,400 USD to more than 72,000 USD. No wonder the Money-on-Chain guys call their token “Bitcoin on Steroids”.
Good for Bullish Times
BitPro is not free of risks. A leverage of 1.2 also means that if the Bitcoin price goes down by 100 US dollars, the BitPro goes down by 120 US dollars. The BitPro is therefore a good investment for bullish times, not for crypto winters. Since the BitPro has been released on the RSK Mainnet in December 2019, we have mostly seen the Bitcoin price going up. Only at the beginning of the Corona hysteria in March 2020, Bitcoin crashed from 10,000 to less than 5,000 USD. This was not a good time for BitPro owners. Compared to having kept their money in Bitcoin, they lost even more. But their losses were easily recouped in the bullish months which followed this short crash.
The March 2020 crash was a good stress test for the Money-on-Chain system. While the Ethereum-based DAI had to face an emergency shutdown, the Bitcoin-based MoC protocol kept working without any problems. The DAI even had to change its collateral structure: now it is backed by a basket of several stable coins. The problem is that nearly 50% of those are dollar-backed coins such as Tether or USDC, which depend on Banks, and have many centralization points of failure. DAI is therefore not a serious competitor of the DoC anymore, since it depends on the fiat money traditional system, whereas DoC is 100% backed by Bitcoin.
Interest and Fees
To understand the second source of income, the interest being paid by BTCx holders, we have to understand the nature of this third token of the MoC system. It is designed for traders who are willing to accept a high risk. BTCx tokens offer a high leverage on Bitcoin. A BTC2x means that it will rise and fall twice as much as the Bitcoin price. A BTC4x (which does not exist yet) would do the same with a factor of 4.
Traders can make a lot of money with these deals and are therefore willing to pay an interest on the tokens they borrow to leverage their trades. This interest goes to the BitPro owners, who are much less risk affine and want a relatively secure passive income.
The third income stream comes from the fees which are charged whenever a DoC, BitPro or BTCx is minted, which means that it is issued by its underlying smart contracts. Currently this fee is 0.1% of which 20% goes to appreciate the price of the BPro. While the leverage can lead to a negative yield of BitPro, the income from interest payments and fees is always positive, which mitigates the risk for BitPro hodlers.
BitPro in Our Portfolio
For our Bitcoin Hodler Portfolio (see page 20 of the weekly report) we have invested 0.4 Bitcoin on December 1st in BitPro, 40% of the one Bitcoin of our exemplary portfolio. The BitPro yield until March 1st is 0.036611 Bitcoin (or 1850 USD). Only in two weeks BitPro’s performance was negative, but these losses were easily compensated by the profits in the rest of the time.
BitPro is by far our most profitable investment: of our portfolio’s total yield of 0.04468217 Bitcoin (or 2258 USD), nearly 82% has been generated by BitPro – much more than the steady interest generated by the lending platforms BlockFi, Nexo, Coinloan and YouHodler, in which we invested 60% of our funds. So we are seriously considering to shift some of the funds from these lending platforms (which are not DeFi anyway) into BitPro.
A nice side effect: if you own BitPro you get Money-on-Chain governance tokens for free. For holding 0.4 worth of Bitcoin in BitPro for three months, we have already received more than 2300 MoC tokens. It is not clear how much these will be worth one day, but if DeFi on Bitcoin becomes a success, owning tokens of one of its key players might be a very good thing.
How to Get BitPro?
So if you want to invest in BitPro, how does it work? First of all, you need a Web 3 wallet. We recommend either Liquality or Nifty for this, as they can easily connect to the RSK Mainnet. The popular Metamask wallet also works, but it is a bit more complicated to configure it. To change your Bitcoin into BitPro, one intermediary step is necessary: you have to convert them into Smart Bitcoins, the native coin of the Rootstock sidechain. Smart Bitcoins (RBTC) are needed for any smart contract execution or any DeFi operation, just as you need Ether to do those things on Ethereum. The good thing is that Smart Bitcoins are pegged one to one to the original Bitcoin. That means: if the Bitcoin goes up like crazy, your Smart Bitcoins will do the same – and you can always convert them back into Bitcoins. If you use the Liquality wallet, you can do this swap directly in your wallet. Otherwise you may use an exchange such as Kucoin or Bitfinex. You may also use RSK’s 2-Way-Peg if you can wait the 15 hours this process takes due to security reasons.
Once you have the Smart Bitcoins in your wallet, the next step is to mint new BitPro tokens. For that step you go to alpha.moneychain.com, sign in with your wallet (make sure that RSK Mainnet is selected) and click on the little house icon. In the middle column of the following page you see BitPro. Click on the green button Mint/Redeem, then choose the amount of RBTC you want to turn into BitPro. Some fractions of RBTC will be spent on this operation, but the “gas price” is much lower than the one on Ethereum. If the Bitcoin price continues to rise, you will recoup the small amounts that you have to spend for these transactions in a short time.
by Aaron Koenig