A US based company just launched a crypto mortgage - its timing couldn't have been worse
Let's say you bought $5000 worth of Bitcoin which today is worth $50k. You think that investment could be worth a quarter of a million dollars in some time. Given the Covid-19 scenario, low-interest rates, and increasing home prices, you also want to buy a house. You don't have any savings, not enough for a 10% deposit on your home and your only option is to sell some of your Bitcoin. However, that potential value of $250,000 is making you question your instincts. Worry not, if you are in the US, then you have an option.
Miami-based fintech startup Milo is introducing what it claims is the world’s first “crypto mortgage.”
Instead of selling your crypto for a down payment to qualify for a mortgage, a crypto mortgage lets you leverage your crypto to invest in real estate.
You can read the details in the article above. I do not want to repeat the information there. However, there is nothing innovative in this "crypto mortgage" other than the fact that you can borrow money for 30 years. I just wonder what the interest rate on that will be!
Now, borrowing against crypto is nothing new. There are plenty of platforms that allow you to borrow money against your crypto, those that have been in this business for longer than Milo. In fact, Milo is limiting the collateral to Bitcoin. Other platforms allow you to borrow against multiple currencies. Additionally, borrowing for 30 years against crypto means you have to be damn stupid. You will incur a higher interest rate for a longer risk period and if you borrow now, then you are surely looking at your deposit being undercollateralized at some point in time in the near future. What will Milo do in that case? I am sure, they will either bump up the interest rate or sell your Bitcoin.
Milo will also offer a 30-year mortgage. The details aren't out yet but how does that work? So the loan is collateralized by both your home and crypto. Even if you take a 30-year mortgage, to me it is still the same as taking a 30-year loan for your deposit, the absurdity of which I have explained earlier.
What about Milo's timing? With rates set to rise and investors becoming risk-averse, it is quite likely that you will need to provide further collateral on the loan you take out. What about interest rates? What interest curve is your mortgage linked to? Is it US rates? Or are they crypto rates? Because it will be a hell of a double whammy if your borrowing rate for the deposit is linked to crypto rates. When crypto prices fall, not only will you have to provide more Bitcoin to make good for under collateralization but the volatility spike will send Bitcoin borrowing/lending rates on an exponential rocket-ship. The timing of the rate reset will also matter. If it is 1 year for the entire 30-year loan, then you may stay safe.
The point is that crypto is a volatile space. If Milo or any other company provides a loan, then they will do that at a rate that helps them cover for the risk due to volatility spikes. In fact, they will cover all the risks! It is the borrower that will be exposed to them. Unless one is financially prudent and is an expert in financial markets, I don't think such loans make sense for anyone at all. If all you do is HODL your crypto, then stay away from such loans. Some products launched in the market are way ahead of their times. This crypto mortgage is such a product. Bitcoin and crypto aren't mature enough to see such rapid financial innovation.
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