By Elise Daniel
Tesla made headlines when the electric vehicle company invested 1.5 million in Bitcoin in February. Last week, Elon Musk announced that customers could now buy Teslas with Bitcoin. Other tech-forward companies including MicroStrategies and Square have also invested in the cryptocurrency.
However, many traditional investors and financial institutions are still approaching Bitcoin with skepticism. Warren Buffet has outright condemned Bitcoin, likening cryptocurrency to rat poison and claiming it has no value. Treasury Secretary Janet Yellen said Bitcoin is an “extremely inefficient” currency. Though historically Bitcoin has been very volatile, even skeptics may find it difficult to ignore the recent BTC bull market.
The digital currency’s increasing adaptation is attributed to what Bitcoin believers have jokingly called “number go up technology” on the Twittersphere. Between October 2020 and March 2021, Bitcoin’s bull run took the price of one BTC from just over $10,000 to just over $60,000, a 500 percent increase. It’s no wonder why more investors and companies want to jump in and buy Bitcoin, but will the mortgage industry also welcome the shift to the cryptocurrency?
The Mortgage Note asked financial analyst Lyn Alden and Motley Fool mortgage analyst Matt Frankel whether or not they think the mortgage industry will hop on the Bitcoin bandwagon.
What is the likelihood of mortgage companies investing in Bitcoin in the near future like other big companies like Tesla have?
Alden: Tech businesses such as Microstrategy, Square, and Tesla were the first companies that trade on major exchanges to allocate Bitcoin to their balance sheet. This makes intuitive sense, since they are closer in philosophy to something like Bitcoin than companies in other sectors.
However, we are also starting to see allocations among large insurance companies for putting a tiny allocation into Bitcoin, which is a bit of a surprise since it’s the other end of the spectrum in terms of being traditional businesses that optimize for risk management above all else. So, it wouldn’t surprise me to see mortgage companies allocate a bit to Bitcoin as well, as a small position.
Frankel: I’m not sure that Bitcoin will be a focus for mortgage companies in the sense that it has for Tesla and other companies. Having said that, I could definitely see some of the major mortgage companies – especially the more tech-focused ones – buying some Bitcoin for customer transaction purposes. For example, maybe a tech-focused mortgage company would offer to let customers take some of their equity out as Bitcoin in a cash-out refinance. But I don’t foresee mortgage companies holding large quantities of Bitcoin on their balance sheets for the foreseeable future.
Would the mortgage industry be wise to work toward allowing buyers to buy homes in bitcoin?
Alden: Bitcoin is primarily being used as a savings technology at this time, so there is interest in buying it and even getting a salary in it, but less so for spending it. Where it is spent, such as through the Lightning Network, it tends to be for digital-native businesses. The market is currently small for desiring to pay off mortgages in bitcoin. There is, however, a hardcore smaller segment of folks that do like to spend Bitcoin for as many things as possible, and there are existing technology providers that allow merchants to accept Bitcoin. I do think that any type of financial firm should be monitoring the broad digital asset space for developments. In particular, one subset of the Bitcoin industry that is interesting is the growing usage of Bitcoin as collateral for USD loans, which can be used for home down payments or other large purchases.
Frankel: In my mind, any time you give customers additional ways to pay, it’s a win-win, especially if that payment method is something that is as interesting to many people as Bitcoin is. There are a lot of people sitting on some pretty big Bitcoin gains, so if Bitcoin were offered as a payment method, it could be appealing.
However, it’s worth noting that Bitcoin as a mortgage payment method isn’t likely to gain serious traction as long as purchases made with Bitcoin are taxable. In other words, if someone bought Bitcoin for $1,000 that they eventually use to make a $3,000 mortgage payment, the $2,000 in Bitcoin appreciation would be considered taxable income and may discourage Bitcoin from being used in this manner.
I’d say that the lenders that have the most tech-focused platforms would have a key competitive advantage if Bitcoin gains serious momentum as a method of payment. Think Rocket Mortgage, Better.com, SoFi, and platforms like those.
What is your advice to the mortgage industry on Bitcoin?
Alden: Because Bitcoin has performed so well, there are a large number of investors that have very sizable allocation to Bitcoins (often seven figures) and are interested in high-end real estate. Some of them will simply cash-out and use the proceeds to fund their lifestyle needs as necessary. However, there is a growing ecosystem around using their Bitcoin as collateral for USD loans, which can then be used for major purchases or other liquidity. Places like BlockFi specialize in that. It would be smart for firms in the mortgage industry to stay on top of this trend, perhaps market to them, and perhaps research the topic of incorporating collateralized Bitcoin into their practice.
Frankel: I’d advise the mortgage industry to pay close attention to Bitcoin adoption. There doesn’t appear to be too much demand for Bitcoin-denominated mortgage payments at the moment, but if the digital currency starts gaining mainstream acceptance and usage, it could be a different story. If that happens, a mortgage lender certainly doesn’t want to be the last one to the party, so while it’s not necessary to accept Bitcoin mortgage payments now, lenders would be wise to start formulating a plan to do so in the future.
Alden and Frankel think mortgage companies should at the very least pay attention to Bitcoin and take it seriously as an investment opportunity. While no mortgage company has yet announced a major investment in cryptocurrency or any plans to allow customers to pay off their loans in Bitcoin, these analysts think companies that move this direction will have an advantage over their competitors.
But crypto-advocates who believe Bitcoin could become the future reserve currency might caution the mortgage industry to brace itself for a total monetary revolution. According to Bitcoin educator Jimmy Song, that type of paradigm shift would change the way people save money and which assets people choose to invest in.
“Bitcoin will change the way people save. Instead of using homes as the major source of savings, people will be using Bitcoin, which will change the entire mortgage industry eventually,” Song told Mortgage Note.
In other words, a world that continues to transition to Bitcoin could flip housing and mortgage demand upside down. This long-term prediction from the Bitcoin community may sound extreme, but that’s all the more reason for mortgage companies to get in with Bitcoin early and at the very least, take it seriously.