Here’s How High Yield Crypto Farms Can Finance Your Property Purchases
Updated: Mar 6
I think it’s surprising that with the sudden growth of cryptocurrency “aka, crypto” over the last 10 years, the potential use cases of cryptocurrency have not been discussed thoroughly by real estate experts in Singapore. Being both an enthusiast in Real Estate and Cryptocurrency, I believe cryptocurrency to have a very strong use case and this article will explain some of the potentials it has as compared to traditional financing options.
Real Estate is thought by many investors as the safest way to grow their money as these instruments have very little volatility.
Here lies the irony when comparing it to cryptocurrency.
Cryptocurrency is an extremely volatile asset that has seen 65,000,000% gain in months to drops of more than 80% in a single day.
However, are you aware that some cryptocurrencies can retain price to their fiat/ commodity counterparts “aka stablecoins”, and that there are also companies that are specializing in cryptocurrency insurance?
Unjustifiably, the media has portrayed cryptocurrencies as reckless investment vehicles and of pictures (NFTs) being worth hundreds of thousands of dollars. These news articles promote an unhealthy stereotype of cryptocurrency that are simply on the surface level analysis of cryptocurrencies’ true use potential.
Before we proceed, it is important to have a basic understanding of cryptocurrency terms and how loan markets work. This article will first start with a brief introduction of what is usually done in a traditional mortgage. We will follow with an explanation of how cryptocurrency lending markets work.
With this new knowledge, we can try to implement this into financing a property in Singapore. We will conclude the article with the advantages and disadvantages of crypto financing.
As with all investments, Do Your Own Research into the subject matter, and by proceeding you agree that you are responsible for all actions taken which might result in losses from your original capital.
Traditional Mortgages and Their Setbacks
Mortgages have traditionally been the method of obtaining financing for your new properties. It usually begins with the buyer applying for an In-Principle Approval. This is an agreement with the banks to loan you the sum required for the purchase of your new property.
However, approval will also depend on your eligibility to their conditions such as credit checks, CPF contribution, and your annual income.
In the case of a default due to the mortgagor being unable to make repayments, the mortgagee will repossess the property and foreclose it.
Enter the World of Decentralized Finance
Here is where it gets juicy!
Decentralized finance (Defi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. The system removes the control banks and institutions have on money, financial products, and financial services.
This helps to alleviate some of the financial difficulties that can be often seen in traditional mortgages.
In regards to a traditional mortgage, credit checks are often required by banks as they are required by the Monetary Authority of Singapore. This is to check if you are capable of repaying the loan and not defaulting it.
The above picture shows an example of what a typical cryptocurrency lending platform will look like. There are many different platforms that you can work with, but we will be using AAVE as it is one of the biggest cryptocurrency lending platforms in the market right now.
AAVE functions slightly different from a traditional mortgage, as the funds deposited into the platform will function as collateral for the funds that you want to borrow.
Market Size refers to the total funds that AAVE, is dealing with for that asset. These represent the total funds which are presently lent out and the remaining amount which is still available.
Total borrowed refers to the number of funds that are being borrowed by existing users.
Deposit APY (Annual Percentage Yield) refers to the amount of interest that you would have gained based on the asset that you have deposited in Aave.
Borrow APY refers to the interest that you have to pay based on the asset that you have borrowed. Similar to a traditional mortgage, stable and variable borrow APY can be termed as fixed and floating rates.
Let’s take a closer look at the Dai stablecoin. This is an asset that is available on AAVE that can be deposited or borrowed.
It might seem confusing but fret not. I’m going to explain in detail the definition of these terms.
The utilization rate is important. Taking for example if you have deposited the Dai stablecoin as an asset and intend to withdraw out, if the utilization rate is close to 100%, you will not be able to withdraw your deposited capital. If you are depositing a huge amount of capital, you will have to be very careful. A high utilization rate results in your deposited assets being less liquid, it is difficult to convert it back to fiat value especially if you have deposited a large sum.
Maximum LTV refers to the number of assets that you can borrow relative to your deposited assets. For example, with a maximum LTV of 75%.
For example, if the collateral has an LTV of 75%, the user can borrow up to 0.75 worth of DAI in the principal currency for every 1 ETH worth of collateral.
Liquidation Threshold refers to the position in which your deposited asset will be liquidated if the borrowed asset is undercollateralized.
For example, if the collateral has a liquidation threshold of 80%, the loan will be liquidated if the debt value is worth 80% of the collateral value.
Liquidation Penalty refers to the percentage of the collateral that will be forfeited when a liquidation occurs.
How To Leverage on Decentralized Finance for Financing Your Property
There are many ways to be able to obtain financial leverage against your assets or even grow your finances with Decentralised Finance.
With AAVE as a lending platform, you can easily obtain financing for your property. There are many asset classes for your consideration. However, there are risks involved when choosing asset classes.
High Risk, High Gains Approach
The aforementioned asset class is the Curve DAO token. Similar to the stock market, every token like a stock has a utility in which if investors believe in it, they can invest.
The Curve DAO token functions as an Automated Market Maker (AMM). To explain it simply, AMMs aids in the exchange of tokens by accumulating their own set of funds (Liquidity Pool), without involving external buyers and sellers.
Although not always the case, tokens with a higher risk tend to have a higher deposit and borrow APY. In this instance, we can leverage the high deposit APY against a stablecoin like DAI. However, stablecoins will usually have a relatively high stable borrow APY as compared deposit APY. In this instance, we will have to leverage on the variable borrow APY.
Similar to traditional mortgages, the variable borrow APY adds a level of uncertainty, giving more risks. From my current analysis, stablecoins usually offer a greater difference between fixed and variable borrowing as compared to non-stablecoins.
Although not explicitly explained, I believe this incentivizes the fixed borrowing of non-stable coins. This inherently requires you to take on the risk of borrowing a much volatile asset.
Should the variable borrowing rates increase to an extent which you are not comfortable with, there is the option of going with a flash loan. The utility behind a flash loan is rather convoluted, but in essence, you can leverage a non-collateralized loan to swap to other assets with a lower interest rate. It can be considered to be similar to a balance transfer.
Financing a Real Estate with Cryptocurrency
AMMs have the potential to open up plenty of avenues for your financing needs. As Estate Magnates is a real estate blog, an example in real estate financing will be most suitable.
In this comparison between and bank loan and an AMM loan, we will assume a property cost of $800k and exclude the payment of miscellaneous fees such as stamp duties, and agent commissions for simplicity.
You are allowed to borrow up to 75% LTV.
Initial Deposit (25% Downpayment): $200k
Loan Amount: $600k
Loan Tenure: 30 years (Maximum)
Interest Rate: ~1.5%
Monthly Repayment: ~$2,070
Intial Deposit (Collateral): $1.45 million
Loan Amount: $800k
Loan Tenure: None
Monthly Repayment: None
Deposit APY (12.74%): $101.92k
Variable Borrow APY aka interest rate (3.72%): $15.708k
Interest Surplus: $154.97k
The obvious detraction to an AMM loan will be the high collateral required. You might be wondering what is the point of even getting an AMM loan if you have more than enough cash to pay for the property.
Yet, this is also its greatest strength. Going for an AMM loan opens up your collateral to receiving high-interest gains. This can even generate a surplus over the interest owed from the borrowed asset.
Furthermore, purchasing a property without a traditional mortgage means that the mortgagor will not have the property repossessed by a mortgagee.
An AMM Loan does not have a loan tenure and a repayment scheme. Hence, the sum that you borrowed can, in a sense, be owed indefinitely!
The dangers of borrowing cryptocurrency are still present. Cryptocurrencies are considered to be volatile assets. As mentioned, these assets have the potential to be highly profitable or costly.
To prevent the liquidation of your collateral, you will either need to reduce your debt value (pay off your loans) or increase your collateral.
There are endless possibilities for your financing with AMMs, and should you be interested in reducing your overall risk exposure to the volatile crypto market, a 50/50 ratio between a bank and an AMM loan is possible.
Thanks for reading my article, decentralized finance provides easy-to-use tools for everyone, with few restrictions. In my opinion, I feel that such loan protocols are extremely valuable to the self-employed and businessmen, who might have difficulties in obtaining traditional financing due to local regulations. Savvy investors who are also familiar with the stock/crypto markets should be interested in this.
However, I feel that AMM loans are not suitable for people who are not comfortable with price fluctuations of the assets involved, and people who are already highly leveraged in traditional financing.
I’m looking out for different personalities who are interested in exploring the full use potential of such AMM loans, so if you are;
A real estate investor looking to optimize their yields in real estate/cryptocurrency
A cryptocurrency, savvy entrepreneur who is willing to explore this lucrative opportunity with me
I am excited to hear from you! Do drop me a message at 96329840!
The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee, or other group or individual. The author does not accept any responsibility whatsoever for any harm or loss arising from accessing or relying on information contained in this blog post.