Crypto for Advisors: Bitcoin and Lending

Today’s article delves into the function of Bitcoin as a pledge in loan transactions, and discusses the prospective advantages it may offer, with insights provided by Meredith Yarbrough, the managing partner at La Hoja Capital Partners.

In Ask an Expert, Eric Tomaszewski from Verde Capital Management discusses the reality of mortgage loans backed by bitcoin, their operation, potential dangers, and key factors to consider.

– Sarah Morton

You’re perusing “Crypto for Advisors,” a weekly newsletter from CoinDesk, which breaks down the world of digital assets specifically tailored for financial consultants. To receive it in your inbox every Thursday, simply click Subscribe here.

Bitcoin as Collateral: Good for Borrowers, Good for Lenders, Good for Investors

As a researcher delving into the intricacies of finance, I’ve been fascinated by its evolution, molded by diverse moral philosophies across civilizations. For instance, ancient Islamic, Judaic, and Hindu traditions emphasized mutual advantage and responsible asset management, focusing on fair risk distribution rather than accumulating interest.

Bitcoin as Collateral

Innovative financial firms such as Battery Finance Inc. employ a dual-collateral approach when issuing loans, where the value of both real estate properties and a proportion of Bitcoin acquired using the loan funds serve as security for the loan. The worth of the real estate asset and the Bitcoin are used to underwrite these loans.

From my perspective as an analyst, I find that Bitcoin’s distinctive traits significantly bolster its lending structure due to its dual role as a growth and inflation-resistant asset. The growing adoption and market interest in Bitcoin stem from its groundbreaking blockchain technology and decentralized essence, making it a reliable store of value amidst inflationary pressures and geopolitical uncertainties. Unlike traditional precious metals, Bitcoin’s supply is genuinely limited, with a maximum of 21 million coins set, and mining expected to cease around the year 2140. This scarcity elevates its value proposition, emphasizing its growth potential while heightening its responsiveness to inflationary trends.

Benefit to Lenders and Investors

The primary duty of a credit manager involves guaranteeing both the repayment of the initial loan amount (principal) and the interest. These managers must strike a balance between setting profit goals (yield targets) and managing credit risk. This delicate task often requires taking on additional risks as the demand for extra returns (incremental yield) adjusts with changes in interest rates and inflation scenarios.

In rapidly evolving technological landscapes, numerous industries are facing the need to revamp their business structures due to unpredictable transformations. Prolonged periods of elevated inflation make these adjustments even more difficult for businesses. For credit managers, altering operational strategies significantly can lead to a significant shift in credit risk. By incorporating bitcoin as collateral, a manager could potentially lower the credit risk while still achieving targeted yields.

In simple terms, adding bitcoin to your investment portfolio can boost overall returns because it has a strong growth potential. This addition also provides better diversification since bitcoin’s performance is not usually linked with traditional credit factors like interest rates or inflation. This means that investors can potentially earn more without taking on additional credit risks. Managers can focus on choosing high-quality borrowers and robust structures, avoiding the usual challenge of increasing risk to gain extra yield.

Benefit to Borrowers

As an analyst, I can attest to the benefits of incorporating Bitcoin into our collateral framework. This integration encourages a unified outlook among borrowers and myself regarding Bitcoin’s long-term value, fostering a mutual understanding that aligns our interests. This alignment incentivizes me, as a lender, to prioritize the success of our partnership, ensuring we both reap the rewards of a prosperous investment in Bitcoin.

Users can enjoy the advantage of expert handling of their Bitcoin holdings by our financial advisors, who keep track of crucial price levels and handle profitable events. This proactive management aims to maximize the asset’s worth, offering users an extra level of knowledge and guidance. Furthermore, accumulating Bitcoin equity grants users more freedom, enabling them to make prepayments or choose early repayment options for their loans.

In addition, adding bitcoin as collateral for loans could offer borrowers improved loan terms. This additional security might lead to lower interest rates and more advantageous borrowing conditions due to a decreased perceived risk. The integration of bitcoin into collateral structures could significantly change the lending market. Its capacity to manage credit risk during times of increasing uncertainties demonstrates its potential for transformation.

Essentially, the effectiveness of this plan relies heavily on the skills and adaptability of the credit management team.

– Meredith Yarbrough, managing partner, La Hoja Capital Partners

Ask an Expert

Q: Can I utilize bitcoin as collateral to purchase a home?

Absolutely, Bitcoin can indeed be utilized for this task, yet it involves a degree of complexity due to various factors influencing its application. The method of holding or converting Bitcoin into an equivalent asset that can be easily integrated with other financial systems (often referred to as “wrapping”) significantly impacts the available options.

Rather than focusing on whether Bitcoin aligns with general trends or market fluctuations, consider first how Bitcoin can contribute to your personal objectives and those of your family. This involves evaluating potential hazards such as price instability affecting your assets, the risk of forced sale due to market conditions, regulatory uncertainties, and custodial issues that could impact your holdings.

Q: Can you dive further into the risks?

Legal/Regulatory Scene: The rules and regulations concerning the use of Bitcoin as security for mortgages are yet to be fully established. It’s crucial to stay updated on the latest developments.

Costs Associated with Bitcoin-Backed Mortgages: The interest rates and fees for bitcoin-backed mortgages often vary significantly from conventional mortgages, typically by multiple percentage points. It’s crucial for potential borrowers to assess the pros and cons of these novel financial products before making a decision.

Safety Measures/Storage: Maintaining the safety of the pledged assets, especially bitcoins, is crucial. Typically, lenders employ third-party or multi-signature wallets as a precautionary measure to secure the bitcoin collateral.

– Eric Tomaszewski, Financial Advisor, Verde Capital Management

Keep Reading