But, while the idea is emerging and many people are drawn to it, is it advisable to offer Bitcoin-backed mortgages and use them? Are there any reasons why this could be problematic for the financial system in the near future? We will discuss these aspects in detail.
Bitcoin-backed mortgages aren’t exactly a new idea being floated around as it has been a staple discussion in the financial world for the past few years. The idea came around parallel to Bitcoin-collateralized loans and other financial contracts that picked up pace in 2017-2018. However, it didn’t get the kind of traction its promoters wanted because of the legal status of the property and how collateral recovery works.
When it comes to loans, it is quite simple; you agreed to take out or give out Bitcoin in lieu of a certain amount of loan in fiat or other digital currency. At the end of the contract, you can give back that amount with interest or have your BTC taken away from the collateral. Plain and simple. This is why even banks are ready to accept crypto-backed loans for clients these days. Even if crypto loses its value, people understand that it is a great investment for the long term, and they are happy to hold on to it for a long period of time to avoid losses.
However, with physical properties like houses, apartments, and other Real Estate, it becomes way more difficult to enforce the terms of the contract, especially contracts written, accepted, and implemented by private platforms which created a big hurdle for the sector.
The Winds are Changing
However, now that the crypto sector has risen to new highs and has become much more mainstream, there are increasing instances of private parties and even commercial enterprises taking out Bitcoin-backed loans and finances. Now, even conventional organizations like banks and public law enforcement are also being empowered to carry out such transactions.
A few startups have already appeared on the horizon that are offering a whopping 30–yearlong mortgage backed by digital currencies primarily Bitcoin itself. But the whole sector is still at a very early bird stage and may need a lot of adoption and innovative thinking before it becomes mainstream in the near future. The current rates for the mortgages vary between 4-6% in the United States but may rise in the future due to the cyclic inflation problem.
What are the Main Concerns?
The Need for Legal Clarity
When it comes to Bitcoin-backed mortgages, platforms need to ensure they have the legal authority to do things that are demanded from this sector. This is because if a user defaults on his/her loan, the platform needs to be able to take over the property. It is expected that some of these platforms aren’t going to be able to do that and that is where investors need to be careful. There is also the case of bugs, glitches and hacks affecting such Bitcoin-backed loan systems.
Be Mindful of Security
DeFi projects aren’t strangers to these intrusions and problems. In the year 2022 alone, more than $1 billion worth of DeFi funds have been hacked and that too, in just four months or so. While regular banking channels including banks are also hacked frequently, it may be more difficult in the DeFi market for platforms to right their wrongs. Their best bet is to have foolproof cyber security.
Mortgages Involve Big Money
Investors also need to be exceptionally vigilant because these are much bigger amounts involved in mortgages than regular loans. For many people, it is their entire life’s worth of savings and that calls for extra caution. The simplest of things one can do is to not fall for scams. Whenever someone offers insane returns, it is always too good to be true. No sustainable platform can offer rates that they cannot afford. That is just bad business, you have to understand that.
The Bitcoin-backed mortgages are expected to really take off soon as companies start to mushroom around the promise. However, it is still risky enough to not go all-in on the matter,
but you can always research and if you find a great deal, you can try something new. The main benefit here is that you can avail of great mortgage rates as companies would like to incentivize early bird investors as much as they can.