Crypto-mortgage loans require the use of cryptocurrency holdings as collateral to bind traditional mortgages or loans.
The procedure for obtaining a cryptocurrency-backed loan begins with the borrower handing over their cryptocurrency to the lender as security, and the lender calculates the maximum loan amount based on the value of the collateral.
Before deciding on interest rates, payback periods, and term lengths, the acceptability of cryptocurrencies needs to be assessed. Once the terms are agreed, the borrower deposits the agreed upon cryptocurrency amount into the lender’s escrow account. In an escrow account, a third party holds and manages funds, property, or documents on behalf of both parties to a transaction until certain criteria are met.
This collateral is locked in for the life of the loan, and to manage volatility risk, borrowers often require a specified buffer between the value of the collateral and the balance of the loan.
Payments are usually made in fiat currency. After the repayment is completed, the borrower receives the collateral back. However, if the value of the cryptocurrency falls significantly, a margin call (the need for additional collateral due to fluctuations in the value of the collateral) may occur, in which case the borrower must restore the necessary margin.
When referring to loans with cryptocurrencies as collateral, the buffer is a predetermined percentage difference between the loan balance and the value of the collateral (in cryptocurrencies). For example, if a borrower’s cryptocurrency collateral is worth 1 BTC, and the lender specifies a 20% buffer, the borrower would need to post collateral equivalent to 1.2 BTC (1 BTC 20% of 1 BTC), effectively creating This provides a buffer against potential volatility over the life of the loan.
This buffer prevents changes in the value of cryptocurrencies from immediately causing margin calls or collateral liquidations, providing a buffer of safety for both borrowers and lenders.
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