The Procedure for Obtaining a Crypto-Backed Mortgage
To obtain a crypto-backed mortgage, you need to follow a specific procedure. Here are the key points:
1. Security: You start by giving your cryptocurrency to the lender as security for the loan. The lender will then calculate the maximum loan amount based on the value of the collateral.
2. Acceptability Assessment: The lender assesses the acceptability of the cryptocurrency before determining the interest rates, payback terms, and term length.
3. Escrow Account: Once the terms are agreed upon, you deposit the agreed cryptocurrency sum into the lender’s escrow account. This account is managed by a third party who keeps and manages funds, property, or documents on behalf of both parties until certain criteria are met.
4. Volatility Risks: To control volatility risks, borrowers often need to maintain a buffer between the value of the collateral and the loan balance. This buffer acts as a safety cushion against sudden changes in the cryptocurrency’s value.
5. Repayment and Collateral Return: Payments for the loan are typically made in fiat money. Once the repayment is complete, you receive your collateral back. However, if the value of the cryptocurrency drastically falls, a margin call may occur, requiring you to restore the necessary margin.
The Importance of a Buffer
In loans with cryptocurrency as collateral, a buffer is crucial. It is a predetermined percentage difference between the loan balance and the collateral value. For example, if your cryptocurrency collateral is valued at 1 BTC with a 20% buffer, you need to provide collateral equivalent to 1.2 BTC. This buffer protects both the borrower and the lender from potential volatility risks throughout the loan tenure.
Hot Take
Obtaining a crypto-backed mortgage involves giving your cryptocurrency as security and maintaining a buffer to mitigate volatility risks. This innovative approach allows crypto holders to access loans while still keeping their cryptocurrency investments. However, borrowers need to be cautious of potential margin calls in case of significant cryptocurrency value fluctuations.
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