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Bitcoin's use case is not limited to buying and selling! Is it feasible to use encrypted cryptocurrency as collateral for a mortgage?

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In March 2023, a homeowner in Taoyuan posted property for sale on the 591 website, not only accepting payment in New Taiwan Dollars but also supporting cryptocurrencies such as Bitcoin as a payment method. Purchasing with Bitcoin was even cheaper by NT$470,000, sparking discussion. However, aside from potential taxes on transactions, buyers might miss out on future Bitcoin price increases. Is there a way to both hold Bitcoin and realize the dream of owning a house? This led to the emergence of cryptocurrency-backed mortgage services.

How Does a Cryptocurrency-Backed Loan Work?

Using cryptocurrency as collateral to obtain a loan denominated in the local fiat currency. It seems more appealing to collateralize cryptocurrency to purchase investment properties or homes compared to traditional bank loans, considering factors like interest calculations, tax implications, convenience, and most importantly — the ability to retain one's crypto assets.

However, all these are contingent upon the borrower's ability to fully repay the loan.

If the value of the cryptocurrency that the borrower has pledged as collateral rapidly drops, there may be a collateral liquidation event. The borrower must replenish the collateral by adding more margin before it drops to the liquidation threshold, or else the liquidation will prevent the borrower from retrieving their crypto assets.

Due to the high volatility of crypto assets, most crypto lending platforms enforce over-collateralization, requiring collateral worth 100%-200% more than the borrowed amount, with margin call notifications received when the collateral value drops to around 170% and liquidation occurring at around 115%, depending on the platform. This differs significantly from traditional banks, which typically require only 10-20% cash collateral.

Advantages and Risks of Cryptocurrency Collateral Loans

As of March, Bitcoin has seen a price increase of around 70% this year. It is understandable why a homeowner would be willing to accept a discount to receive Bitcoin, as it could be seen as a bullish move on the future price of Bitcoin. The service of using cryptocurrency as collateral for loans is gradually being realized in the real world, including various crypto lending platforms like NEXO, Milo, and Ledn. The following will outline the pros and cons of this product:

Pros:

  • Quick access to usable funds within a day without selling crypto assets
  • No need for traditional bank credit checks
  • Loans are different from trades and do not incur related taxes

Cons:

  • Limited types of accepted crypto collateral, mainly Bitcoin and Ethereum
  • Significant price drops may lead to collateral liquidation (borrower unable to retrieve)
  • Mostly over-collateralized, requiring two to three times the value of the loan amount in crypto assets as collateral

Will Traditional Banks Accept Loans Backed by Cryptocurrency Assets?

Former banker and current CEO of blockchain carbon trading platform BetaCarbon, Guy Dickinson, expressed uncertainty about financial institutions adopting cryptocurrency assets as collateral for lending services in the future, citing risk concerns as the primary consideration. He believes it will be challenging to achieve unless there are specific and long-proven viable products.

However, he also added that securities such as risk collateral are not uncommon: