How dangerous is a mortgage secured by cryptocurrencies?
Analyst firm Weiss Ratings has issued a warning about the risks of mortgage programs backed by cryptocurrencies. Experts paid particular attention to Milo Credit, an American startup that offers its customers mortgages backed by Bitcoin , Ethereum and stablecoins. Such services can be “very dangerous” for the clients themselves due to the high volatility of the crypto market and the difficult situation in the US economy. Let's talk about the situation in more detail.
We talked about the work of Milo Credit at the end of last week. In general, the company’s scheme boils down to issuing a mortgage secured by cryptocurrencies, and in this case, users do not even need to sell their own coins.
In addition, the company promised faster application processing than traditional mortgages. Accordingly, large holders of digital assets have a real case of using their own coins without having to get rid of them. Read more about innovation in a separate article .
How cryptocurrencies are used
In a recent Weiss Ratings report, company analyst John Markman called for caution on crypto mortgages, citing the poor stock market and crypto environment this year, the US housing bubble, rising interest rates, and upcoming Federal Reserve policy changes. systems. Here is his remark, in which he shares his vision of the situation in the niche.
This service seems like a win-win, assuming real estate prices and the value of cryptocurrencies continue to rise. But there are indications that both of these aspects are unlikely to be "winning bets" in the near term. Bitcoin has fallen 40 percent since hitting its high in November 2021. US real estate prices are now facing headwinds in the form of Fed policy changes and higher mortgage rates.
Note that the situation with Bitcoin and the cryptocurrency market as a whole is really not the best right now. Today, the first cryptocurrency is valued at $38,975, which is 43.6 percent lower than its all-time high. At the same time, over the past month, the cost of BTC has dipped by 16.1 percent.
Against the backdrop of what is happening, analysts are also preparing their own audience for a further collapse of BTC to the level of 25 thousand dollars. However, other traders at the same time are betting on the absolutely incredible growth of Bitcoin to $100,000 by today's standards. Arguments in favor of the latter prediction are described here.
However, Markman does not rule out that investing in the crypto market in itself can be successful in terms of making a profit. However, participation in a mortgage program backed by cryptocurrencies creates too many “variables” that significantly increase the risks.
According to Cointelegraph sources , one of these variables is the gradual increase in the base rate of the US Federal Reserve. An increase in the rate affects the yield of US bonds. As the deposit rate rises, in order to attract investors to buy US government debt, the government must also offer a higher rate. All this increases the pressure on different sectors of the economy and is an important obstacle to the growth of the. stock market, analysts say
However, if the real estate market is excluded from the equation, then in the event of a serious drop in BTC and ETH over the next few months, Milo customers still have enough room to maneuver. According to the terms of the mortgage, the price of the collateralized crypto assets “may fall with zero consequences until it reaches 35 percent of the total loan amount.” To avoid liquidation, users must top up their deposit within 48 hours.
In other words, in the event of a market crash, they will be forced to replenish the amount of collateral, because otherwise their position may be closed. This is the normal working pattern for decentralized loans that have become popular in the digital asset space in mid-2020. Since then, such relations between market participants have only gained momentum.
We believe that in the end, the arguments of experts boil down to the volatility of cryptocurrencies, which is far from new, and unstable conditions in world markets, which is also known to users. Therefore, in general, there are no more objective reasons not to get involved with the new mechanism for using coins. However, at the same time, investors should still take into account the situation in the niche and not risk those funds that they cannot lose.
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