Crypto Real Estate is here – Bitcoin mortgages are just the start
As crypto-assets continue to increasingly integrate into mainstream financial conversations, financial markets, and are embraced by financial institutions, it is only a matter of time before more sophisticated financial instruments take hold. make their debut. Even as bitcoin and crypto exchange-traded funds (ETFs) continue to languish under regulatory scrutiny, other products and services have forged ahead. Decentralized Finance (DeFi), Non-Fungible Tokens (NFTs), and Decentralized Autonomous Organizations (DAOs) are just a sample of the blockchain-related asset classes that have been dominating the market conversation since 2021. Add discussions around Web 3.0 and the tokenization of both virtual and physical assets, and the result is a mighty whirlwind of crypto conversation.
One such instrument that might fly under the collective radar of market participants, however, is the potential for bitcoin and other crypto-assets to play a role in the mortgage and broader debt collateral space. As real estate prices have skyrocketed over the past few years – echoing concerns last voiced in 2007 – the intersection of crypto and real estate has also increased.
Let’s take a look at some of the key trends driving this convergence of crypto with real estate, and what investors should keep in mind moving forward.
The future is now. At first glance, the convergence of crypto-assets and mortgage finance may seem like a futuristic couple, but the reality is that blockchain and real estate are already coming together. From simple cases of individuals buying real estate using cryptocurrencies, to NFTs playing a role in reducing paperwork related to titles and title insurance, to blockchain playing a key role in the record keeping process, the implications for real estate are far-reaching.
In addition to these connections, important as they are, the potential of crypto-backed mortgages is still an emerging use case that remains untapped at scale. NFTs have a very real role to play in tokenizing the ownership of real estate assets, and already go far beyond simply relegating to crypto art speculation. Crypto-secured mortgages are a logical next step in the maturation of cryptoassets, but as with any instrument, the specifics will vary.
Details will vary. Neither mortgages nor crypto is a simple market to understand, and especially when combining complex topics, it is essential that the specific details of each transaction are examined. The crypto mortgage market is no exception to this rule, as several different options are available to potential buyers looking to secure a purchase using previously acquired crypto assets.
For example, there are options that require 100% of the requested funding to be secured by crypto assets; a $1 million mortgage would require $1 million worth of crypto as collateral. Other options allow customers to borrow against crypto assets to produce a down payment and fund the rest of the mortgage using conventional means.
In addition to the specifics of the loan, investors and borrowers should also research the process that occurs if the collateral value falls below a predetermined level. Are the crypto-assets held on deposit with the crypto mortgage lender or with a trusted third party? If the price of this collateral exceeds a certain level, is the crypto liquidated or does the borrower have the option of making additional collateral deposits? Since volatility is a common characteristic of financial assets, including crypto, these are not unnecessary concerns.
Guard matters. Based on the previous points, a question that needs to be asked is which entity has custody of the crypto-assets used as collateral? Bitcoin
For example, if a crypto-investor chooses not only to secure a mortgage using crypto-assets, and therefore transfer custody to an external party, but also to document this transaction using an NFT, understanding provenance and custody is essential. With the number of decentralized exchanges and new entrants in the space, conducting proper due diligence is an essential step for every investor.
Real estate and real estate-related financial products are clearly increasingly influenced by the growing importance of crypto-assets in traditional financial markets. There are several underlying use cases that different types of blockchain-based applications can bring to improve the current state of real estate transactions. As always, the potential and desirability of these transactions must be weighed against the possible risks, but opportunities abound for committed and proactive investors.