What Are Crypto-backed Mortgages and How Do They Work

Understanding Crypto-backed Mortgages

Crypto-backed Mortgages are a financial innovation that is gaining traction and involves the use of cryptocurrencies such as Bitcoin (BTC) or Ether (ETH) as collateral to secure traditional mortgage loans. This concept emerged alongside the rise of the cryptocurrency market, driven by extreme volatility and the potential for huge value appreciation, which inspired the use of digital assets to obtain conventional loans.

In Crypto-backed Mortgages arrangements, the loan amount is determined based on the value of the cryptocurrency collateral, which is held as collateral until the loan is repaid. To facilitate secure and transparent transactions, the organization leverages blockchain technology and smart contracts, enabling cryptocurrency-backed loans that utilize digital assets to access financing.

One notable example of Crypto-backed Mortgages emerged in 2018 with the introduction of Salt Lending, a decentralized lending platform. The platform allows borrowers to use their cryptocurrency holdings as collateral for loans. However, legal and regulatory challenges prompted adjustments to their offerings.

Types of Crypto-backed Mortgages

Crypto-backed Mortgages are usually divided into several categories, including the following.

Purchase Mortgages

Used for real estate financing, secured by cryptocurrency collateral by the borrower.

Cash-Out Refinancing

Homeowners with mortgages refinance their properties, using cryptocurrency holdings as collateral to access funds for various purposes.

Bridge Loans

Borrowers obtain short-term bridge loans using cryptocurrency collateral to cover the gap between buying a new property and selling an existing property.

How Crypto-backed Mortgages Work

Crypto-backed Mortgages involve pledging cryptocurrency holdings as collateral to secure a traditional mortgage or loan.

The process typically begins with the borrower providing cryptocurrency to the lender as collateral, and the lender determines the maximum loan amount based on the value of the collateral. After assessing the acceptability of cryptocurrencies, terms such as interest rates, repayment conditions and loan duration are set.

Once the terms are agreed upon, the borrower deposits the agreed amount of cryptocurrency into the lender's escrow account. An escrow account, managed by a third party, holds and controls funds, property, or documents until certain conditions are met.

Throughout the life of the loan, the collateral remains locked, so borrowers are often required to maintain a certain buffer between the value of the collateral and the loan balance to mitigate volatility risk.

Payments are usually made in fiat currency, and once payment is complete, the borrower regains ownership of the collateral. However, large fluctuations in cryptocurrency values ​​can trigger margin calls, requiring additional collateral to be provided by borrowers.

The buffer in a crypto-backed mortgage acts as a predetermined percentage difference between the loan balance and the value of the collateral. For example, if a borrower's cryptocurrency collateral is worth 1 BTC, and the lender sets a 20% buffer, the borrower must provide collateral equivalent to 1.2 BTC, which serves as a hedge against potential volatility risks.

Advantages and disadvantages

Benefit

Access Assets Without Selling: Allows cryptocurrency holders to access assets without selling, avoiding taxes and facilitating traditional investments.

2. Financial Inclusion: Providing access to traditional financing for those who do not have access to conventional banking institutions, thereby encouraging financial inclusion.

Exposure Control Allows borrowers to control exposure to digital assets when accessing traditional financing, potentially hedging against significant price fluctuations.

Lack

Volatility Risk: Fluctuations in the value of cryptocurrency over the term of the loan may trigger a margin call or liquidation.

Regulatory Uncertainty: The legal and regulatory framework for cryptocurrency-based financial products continues to evolve, raising issues of stability and legality.

Security Vulnerabilities: Security breaches can compromise the security of digital assets used as collateral, requiring a thorough understanding of the terms and conditions.

Risk-Reward Evaluation: Individuals should assess the overall risk-reward ratio to determine the prudence of obtaining a mortgage considering their circumstances.

How To Buy Crypto With Bittime

You can buy and sell crypto assets in an easy and safe way via Bittime . Bittime is one of the best crypto applications in Indonesia which is officially registered with Bappebti. 

To be able to buy crypto assets on Bittime, make sure you have registered and completed identity verification. Apart from that, also make sure that you have sufficient balance by depositing some funds into your wallet. For your information, the minimum purchase of assets on Bittime is IDR 10,000. After that, you can purchase crypto assets in the application. 

Learn How to Buy Crypto on Bittime.

Monitor price chart movements of Bitcoin (BTC), Ethereum (ETH), Solana (SOL) and other cryptos to find out today's crypto market trends in real-time on Bittime.

Also Read:

What Is Gold-Backed Cryptocurrency?

What is a Collateralized Mortgage Obligation (CMO)? Read the complete explanation

What is Crypto Lending, Crypto Loans?

DISCLAIMER : This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.