Crypto Collateral a New Choice For Private Money Lenders?

Is crypto collateral suitable for mortgages from average private lenders and hard money lenders? No, it is not and we tell you why. We look at what a crypto mortgage is, what crypto collateral is, how crypto lenders work, as well as the benefits and the risks involved. We focus on whether crypto collateral is suitable for private mortgages today. To learn about blockchain mortgages, read our article on blockchain mortgages: a better future to empower lending?.

In this Article

What are Crypto Mortgages and How Do They Work?

Crypto mortgages operate on a principle similar to traditional mortgages, but with a big difference. Instead of using fiat currency as collateral, such as U.S. dollars, a borrower can leverage their cryptocurrency holdings such as Bitcoin and Etherium to secure a loan for purchasing real estate.

On a traditional mortgage, you may need to put down a cash payment towards your loan, for example, 10%. This would be in a currency such as U.S. dollars, which is the same money you use every day. The difference for a crypto mortgage is that the lender will accept digital assets as collateral rather than a normal cash downpayment. The process typically involves the following steps:

1. Cryptocurrency Valuation: The lender evaluates the value of your cryptocurrency holdings, taking into account factors such as market volatility and liquidity.
2. Loan-to-Value (LTV) Ratio: Based on the valuation, the lender determines the loan-to-value (LTV) ratio, which represents the maximum loan amount you can receive relative to the value of your cryptocurrency collateral.
3. Collateral Deposit: You deposit the required amount of cryptocurrency as collateral with the lender, often held in a secure, third-party custodian wallet.
4. Loan Disbursement: Once the collateral is secured, the lender disburses the loan amount in fiat currency, which you can use to purchase or refinance the desired property.
5. Loan Repayment: Throughout the loan term, you make regular payments, typically in fiat currency, to repay the principal and interest.
6. Collateral Release: Upon full repayment of the loan, the lender releases the cryptocurrency collateral back to you.

It’s important to note that the specific terms and conditions, including interest rates, loan durations, and collateral requirements, may vary among different lenders.

Benefits of Using Crypto as Collateral for Mortgages

Crypto mortgages offer benefits, such as increased accessibility to individuals with substantial digital asset holdings but limited access to traditional financing. By accepting cryptocurrency as collateral, lenders allow investors to leverage their crypto assets effectively and diversify their investment portfolio.

Differences Between Crypto Mortgages and Traditional Mortgages

While crypto mortgages share some similarities with traditional mortgages, there are several key differences that set them apart:

Leading Crypto Lenders

Several companies have emerged as pioneers for this type of lending:

1. Milo: Milo is a decentralized finance (DeFi) platform that offers crypto-backed mortgages and loans. They allow borrowers to use their cryptocurrency holdings as collateral and access liquidity without selling their assets.
2. Ledn: Ledn is a Canadian-based company that provides crypto-backed loans and savings accounts. They offer a range of lending products, including mortgages secured by Bitcoin and other cryptocurrencies.
3. Nexo: Nexo is a leading crypto lending platform that allows users to borrow against their cryptocurrency holdings. While not exclusively focused on mortgages, Nexo offers a variety of lending products, including crypto-backed loans.
4. EveryCoin: EveryCoin is a Swiss-based company that specializes in crypto-backed lending solutions, including mortgages. They offer a range of lending products tailored to individuals and businesses.
5. YouHodler: YouHodler is a FinTech company that provides crypto-backed loans and other financial services. They allow borrowers to use their cryptocurrency holdings as collateral for various loan products, including mortgages.

Crypto Companies to Watch

Here are some promising crypto mortgage companies to keep an eye on:

1. Loanly: Loanly is a decentralized lending platform that aims to revolutionize the mortgage industry by leveraging blockchain technology and smart contracts. They offer crypto-backed mortgages and aim to provide a more transparent and efficient lending process.
2. Teller Finance: Teller Finance is a DeFi lending protocol that allows users to borrow against their cryptocurrency holdings. While not exclusively focused on mortgages, their platform could potentially be adapted for crypto-backed mortgage lending.
3. Maple Finance: Maple Finance is a decentralized lending platform that facilitates institutional lending and borrowing of cryptocurrencies. They have the potential to expand into the crypto mortgage market, offering lending solutions to institutional investors and borrowers.
4. Goldfinch: Goldfinch is a decentralized lending protocol that focuses on providing access to capital for borrowers in emerging markets. While not specifically targeting crypto mortgages, their platform could potentially be adapted for this purpose.

Risks and Considerations of Crypto Mortgages

While crypto mortgages sound exciting, the potential risks involved are considerable:

1. Cryptocurrency Volatility: The value of cryptocurrencies can be highly volatile, which can impact the value of your collateral and potentially lead to margin calls or the risk of collateral liquidation if the value drops significantly.
2. Regulatory Uncertainty: The regulatory landscape surrounding cryptocurrencies and crypto mortgages is still evolving, and changes in regulations or policies could affect the viability and terms of these financial instruments. The U.S. Securities and Exchange Commission has had high profile cases, an example of which is where a judge in a Coinbase case endorses the SEC’s crypto regulation by enforcement strategy. Learn how the SEC regulates crypto.
3. Liquidity Risks: Depending on the cryptocurrency used as collateral, there may be liquidity risks if the asset becomes difficult to trade or convert to fiat currency. Learn about the Top 10 cryptocurrencies.
4. Cybersecurity Risks: As with any digital asset, there are inherent cybersecurity risks associated with storing and managing cryptocurrency collateral, such as hacking, theft, or loss of private keys.
5. Limited Availability: Crypto mortgages are still a relatively new concept, and the number of lenders offering these services may be limited, potentially reducing competition and choice for borrowers.
6. Tax Implications: The use of cryptocurrency as collateral may have tax implications, and it’s essential to consult with tax professionals to understand the potential tax consequences. For example, selling Bitcoin or other crypto can trigger capital gains tax. Read this guide on crypto taxes in the USA.
7. Default Risks: If you default on your crypto mortgage, the lender may seize and liquidate your cryptocurrency collateral, potentially leading to significant losses if the asset’s value has increased.

Future Prospects of Crypto Mortgages

While crypto mortgages are still in their early stages, the future prospects could be promising. In 2024, we can see how the lending world is changing, but there’s a lot that needs to happen before crypto mortgages are mainstream:

1. Mainstream Adoption: As cryptocurrencies gain wider acceptance and understanding, more traditional lenders and financial institutions may embrace crypto mortgages, leading to increased availability and mainstream adoption.
2. Regulatory Clarity: As regulatory bodies develop clearer guidelines and frameworks surrounding cryptocurrencies and their use in financial transactions, it could provide greater certainty and confidence for lenders and borrowers alike.
3. Technological Advancements: Ongoing developments in blockchain technology, smart contracts, and digital asset management could streamline and enhance the processes involved in crypto mortgages, making them more efficient and secure.
4. Integration with Real Estate Platforms: We may see the integration of crypto mortgage offerings into existing real estate platforms and marketplaces, providing a seamless experience for buyers and sellers.
5. Expansion of Accepted Cryptocurrencies: As new cryptocurrencies and digital assets emerge, lenders may expand the range of accepted collateral, providing more options for borrowers.
6. Tokenization of Real Estate: The concept of tokenizing real estate assets on the blockchain could potentially enable fractional ownership and new investment opportunities, further driving the integration of cryptocurrencies and real estate.
7. Global Market Accessibility: The borderless nature of cryptocurrencies could facilitate greater global accessibility to real estate markets, enabling investors and homebuyers from around the world to participate more easily.

Conclusion

Let’s put it simply and clearly, in 2024 there are no crypto coins or other assets that could be considered in any way a safe investment. The value of your collateral might be $100,000 today, $500,000 tomorrow and $0 the day after! Too much can go wrong and at best crypto investment is speculation. Most governments warn that if you invest in crypto, expect to lose all your money.

In 2024, should your average private lenders and hard money lenders who aren’t specialized with crypto assets take crypto as collateral? We would say absolutely not! There are too many risks and nothing beats good old U.S. dollars as collateral. There’s enough that can go wrong with the real estate market without worrying about the collateral becoming worthless. By definition, private lenders and hard money lenders are higher risk lenders than traditional banks, so it does not make sense to increase the risk even further.

It is far more important to lend to the right borrower for the right real estate investment, than complicate things further with crypto.We have articles, advice and online financial calculators to help you be a successful private lender.

Crypto lending companies like Milo, Ledn and Nexo are currently niche and it may be some time before they become more mainstream. They have the expertize to evaluate and handle crypto assets but most lenders currently do not.

So what about the future?

In this article we are talking about using crypto today as collateral, which does not make sense for average private lenders and hard money lenders. In the future, when crypto assets are more stable, valuable and more widely accepted, that could change.

We think there will be many changes to how lenders operate over the next decade and beyond in the 2030s and blockchain technology is really exciting. Read our article on blockchain mortgages: a better future to empower lending?.

Frequently Asked Questions:

What are the eligibility requirements for a crypto mortgage?

Eligibility for a crypto mortgage typically requires the borrower to hold a significant amount of cryptocurrency, such as Bitcoin or Ethereum, which can be used as collateral. Lenders may also evaluate the borrower’s credit score, income stability, and overall financial health.

How does the application process work?

The application process for a crypto mortgage is similar to that of traditional mortgages but includes additional steps related to the verification and valuation of your cryptocurrency holdings. Applicants generally need to provide identification, financial statements, and documentation of their crypto assets. Once the assets are verified, lenders will appraise the value of the collateral before proceeding to loan approval.

How are interest rates determined?

Interest rates on crypto mortgages are influenced by several factors including the value and stability of the cryptocurrency used as collateral, the borrower’s creditworthiness, and prevailing market conditions. Due to the volatility of cryptocurrencies, lenders often charge higher interest rates compared to traditional mortgages to mitigate risks.

What happens in the event of a default?

In the unfortunate event of a default, the lender has the right to liquidate the cryptocurrency collateral to recover the loan amount. This process differs from traditional mortgages, where the property itself is typically foreclosed upon. Given the volatility of crypto assets, it is possible the collateral is not sufficient to pay back the lender. Even if there is no default, a lender may have to sell the collateral if its value changes. See below for a margin call.

What is a Margin Call?

For a mortgage where the collateral is in cryptocurrency and the price of the cryptocurrency has collapsed, a margin call would be initiated if the value of the collateral falls below a certain predefined threshold in relation to the outstanding loan amount. In this scenario, the lender may require the borrower to deposit additional cryptocurrency or additional funds to cover the margin shortfall, ensuring that the loan remains adequately secured. If the borrower fails to meet this requirement, the lender may liquidate the collateral to recover the outstanding loan amount, potentially resulting in the borrower losing a portion or all of their cryptocurrency holdings.

Are there any additional fees associated with crypto mortgages?

Yes, crypto mortgages may come with additional fees such as origination fees, appraisal fees for the cryptocurrency, and transaction fees for transferring crypto assets. Potential borrowers should inquire about all associated costs upfront to avoid unexpected expenses.

Further Reading on Crypto Lending:

• Learn about Crypto Assets from Investor.gov.

DISCLAIMER: We are not attorneys and we cannot advise you regarding your particular circumstances. You must always obtain competent legal counsel and financial advice. We believe this information to be accurate, but please check with a qualified real estate attorney in your state before making any decision based on this information.