Can You Use Crypto To Buy a Home?
Written by
Yaël Bizouati-Kennedy
Edited by
Cory Dudak
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The use of crypto has become ubiquitous and mainstream. Consumers can now choose to pay in digital assets for pretty much anything. A recent Deloitte report found that, globally, 220 million people use cryptocurrency now, and customers are paying for everything with it — from travel to sports tickets to mobile phone services. Some are even using crypto it to buy homes. However, it’s important to understand how this works and whether there are any potential pitfalls to avoid.
Trevor Filter, co-founder of Flexa, noted we’re still in the early days of on-chain finance, and this includes borrowing and lending using permissionless protocols such as Aave, Compound, Kamino Finance and others.
“Because of this, we are still working our way toward making it easy enough for everyday people to feel comfortable,” he said, adding that the collapse of Luna showed why it’s so important for responsible and regulator-friendly development in this space.
Crypto Loans: What Are They and Who Do They Cater To?
A crypto loan is a loan via a crypto lending platform. One company offering such loans is Milo, which explained on its website: “A crypto-backed mortgage lets you leverage your BTC, ETH or USDC to invest in real estate. Instead of selling your crypto, you can use it as collateral to qualify and secure a mortgage to purchase a home.”
This innovative approach caters to crypto owners who prefer not to liquidate their holdings, whether due to their long-term faith in asset appreciation — known as ‘HODLing’ — or to avoid triggering taxable events, according to Patrick Gruhn, entrepreneur, lawyer, former FTX (now defunct) executive and CEO of PMX Technologies.
“By leveraging crypto assets, these loans provide access to funds that traditional banking systems might not readily support,” said Gruhn, adding that crypto lenders streamline the underwriting process by relying solely on the collateralized assets, eliminating the need for credit checks and reporting requirements.
“Consequently, crypto loans are typically processed swiftly and efficiently, unencumbered by conventional business hour constraints,” he said.
Another differentiator according to Gruhn: the duration of these loans is extremely flexible, ranging from mere seconds to perpetual, open-ended durations.
“There are even DeFi protocols that allow users to borrow against “bluechip” NFTs,” he added.
What Are the Different Types of Crypto Loans?
As Gruhn explained, crypto loan providers typically fall into two different buckets: centralized finance (CeFi) or decentralized finance (DeFi). CeFi protocols often charge service fees, taken as profits, while DeFi platforms often charge network utilization fees, which can be distributed to users, along with the platform creators and operators, he said.
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On the other hand, DeFi platforms, such as makerDAO or Aave, rely solely on pre-programed software called smart contracts to administer the loans, Gruhn added.
“DeFi smart contracts are most commonly used to facilitate loans between two private parties, known as peer to peer (or “P2P”), and simply require a borrower to connect a web3 digital wallet to the protocol, which typically locks the assets from moving and anonymously matches a lender with the borrower at a pre-programmed rate and duration,” he noted.
Which Platforms Should Consumers Look At?
Gruhn underscored the fact that as an emerging and volatile industry, the health of vendors and protocols is evolving quickly, and should always be evaluated prior to using.
“Relatively established companies, such as Nexo and Bitcoin Suisse are commonly utilized CeFi platforms, while Aave, Compound, and dYdX are popular platforms with large user bases,” Gruhn explained. “As a general rule for long term loans with autopay functionality, even though technically feasible with DeFi, currently centralized options are more viable in my opinion.”
Are There Drawbacks?
As Gruhn further argued, crypto loan providers and platforms typically operate outside the regulatory framework that governs traditional banks, meaning they lack protections such as Federal Deposit Insurance Corporation (FDIC) insurance.
“Recent events, such as the bankruptcies of Celsius or BlockFi, have highlighted the significant risk borrowers face in such scenarios, where the loss of collateral looms even if loan payments are up to date,” he said. “Since the lenders often take custody of the assets, a borrower is fully subjecting the security of their crypto to the lender.”
There are also other risks involved — as with decentralized finance, you use smart contracts.
“But if something happens where you become undercollateralized, then it’s a smart contract executing that decision,” said Brian Dixon, CEO of Off The Chain Capital. “So you can’t call in and say, ‘Hey, I need more time to fix this.’ It just gets closed out altogether and there’s not a human you can call. Basically, when using these things, don’t use more capital than you’re willing to lose. Again, it’s still early days for this technology.”
Other experts echoed the sentiment, such as Jess Houlgrave, CEO of WalletConnect, who said because transactions that utilize smart contracts are so automated, there is little a borrower can do to avoid liquidation.
“In the coming years, however, I think these smart-contract risks will get ironed out. But it will take time, and it’s important that users approach borrow-lend products on-chain with some degree of caution,” added Houlgrave.
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