- Adam Masato took out $33,000 in crypto-backed loans to finish his investment property.
- Some crypto-backed loans don’t have monthly payments and require no credit checks.
- Masato says it’s “stressful” to borrow against such a volatile asset.
Real estate investor Adam Masato makes $8,400 a month in passive income from an Airbnb rental, but getting the $342,000 in startup costs to fund the project presented a unique challenge.
Besides liquidating Roth IRA investments, taking out a HELOC against his condo, and getting a traditional personal loan, Masato decided to take out $33,000 in loans backed by his cryptocurrency holdings.
Getting a traditional mortgage wasn’t really an option. Masato explains, “Several lenders told us this would be a complicated loan to obtain, specifically because [the rental property] is a single-wide manufactured home on private land, not a mobile home park; also because it’s not a primary residence.”
Masato had to put up at least one bitcoin and some USD stablecoins as collateral to get a total of $33,000 in cash loans from Celsius, a company that offers crypto-backed individual and business loans, to fund part of his investment property.
If you’re interested in taking out crypto-backed loans, here are a few things to consider.
Some crypto-backed loans don’t have monthly payments
Unlike a traditional mortgage or other loan, some crypto-backed loans don’t require a set monthly payment. Of his loans, Masato says, “The loans are 0% interest with no monthly payments, as long as they’re holding my bitcoin as collateral. The caveat is I can only borrow 25% of the dollar value of my bitcoin collateral.”
Mitesh Shah, founder of cryptocurrency analytics provider Omnia Markets, Inc., explains that crypto-backed loans are the same as securities-backed loans — ie loans backed by stock or fund holdings — except that the underlying assets exist on a blockchain.
Shah adds that most crypto-backed loans have low interest rates and faster transaction times, plus they typically don’t require traditional credit checks since the loan can be paid back with the crypto holding. “Credit checks are not required for crypto loans because the cryptocurrency itself becomes the collateral for the loan,” he says. †
history, income, or debt are not needed.”
If the value of your coin drops, you’ll have to put up more as collateral
Masato says that, unlike a traditional mortgage, he could be called on to provide more crypto as collateral if the value of his coins drops. “If bitcoin drops in value below a certain amount, I will get a margin call and have to provide more bitcoin as collateral.”
A margin call occurs when the equity in your investment account drops below a certain amount, leaving you owing money to your lender and brokerage. It happens at traditional brokerages that manage stock market investments as well. Crypto lenders use the same technique to make sure they’re protected if the price of bitcoin drops dramatically.
Desh Weragoda, mortgage banker and chief technology officer at MBANC, a company that provides both crypto and traditional loans and mortgages, says that most crypto-lending companies “put your crypto in a custodian account, which is basically an intermediary that holds your crypto, and they do a margin call on it.”
If the price of bitcoin drops below the margin call, Weragoda says that crypto-lending companies will liquidate the amount of crypto held in the custodian account if you’re unable to put up more crypto as collateral. If that happens, “you essentially lost your crypto,” he says.
Borrowing money against crypto works best for investors who plan on ‘hodling’
Even if you have enough crypto to use as collateral for a loan, you’ll need to consider your own investing strategy before using your holdings to take out a loan. Says Shah, “Crypto-backed loans may be the preferred method for some individuals that only invest under a long-term methodology and have no interest in transacting those coins.”
In simple terms, if you plan on holding your crypto — a strategy commonly called “hodl” in the crypto community — a crypto-backed loan might work for your lending needs.
Masato plans on paying off the crypto-backed loans as soon as possible
When asked about the mental and emotional toll of borrowing against such a volatile asset, Masato says, “It can be stressful, especially when the price gets close to the margin call limit.”
He adds, “I’ve always intended to close out the loans as soon as I have the
to do it, regardless of the price. I don’t think it’s smart to carry a crypto-backed loan any longer than you need to. Because the crypto-lending space is so young, there’s no FDIC insurance, and definitely no bailouts if any of the lenders go under.”