“Ultimately, cryptocurrencies can be liquidated if the collateral value falls below a certain threshold, such as 35% of property value,” the report says.
Investment banking giant Citigroup has published a study on how real estate technology could affect the real estate market, mentioning virtual goods in the metaverse and cryptocurrency-backed mortgages.
In a report published on Wednesday, titled “The Home of the Future: PropTech – Towards a frictionless real estate market?” Citi said that cryptocurrencies, Blockchain, and property in the metaverse had the “potential to transform the traditional real estate market.” While crypto-backed mortgages could streamline the home buying process, many individuals have seen investments in metaverse properties soar in the past two years.
Citigroup Report Highlights
Citi reported that crypto-asset-linked real estate loans could allow investors to “use their investment earnings” without incurring capital gains taxes, but commented on the potential for risk in a volatile market. While many standard fiat-linked loans have regulatory procedures to assess a borrower’s ability to repay, crypto holders could be forced to pay significantly more if the price of tokens falls during a bear market.
“If the value of the cryptocurrency declines, the borrower may be subject to margin calls and ultimately the cryptocurrency may be liquidated if the value of the collateral falls below a certain threshold, such as 35% of the value of the collateral property,” the report said. “Introducing cryptocurrency exposure into the credit profile could increase the overall risk of the loan.”
Individual and corporate owners of virtual property in The Sandbox
In addition to buying physical properties, the Citi report discussed the potential benefits of owning and monetizing “digital real estate” in the metaverse. Specifically, the researchers detailed how individual and corporate owners of the virtual property in The Sandbox (SAND) – called LAND – have treated the metaverse as an investment similar to real-world property, with prices rising from about USD 100 per LAND in January 2021 to no less than USD 200,000 a year later:
“Given the nascent nature of the virtual real estate environment, many of LAND’s buyers have no concrete plans to cultivate the properties and are limited to speculating on the future growth of the platform and thus LAND’s price appreciation.”
In conclusion, the banking giant is not the first to consider the risks of cryptocurrency-backed mortgages. Prior to the recent bear market, Florida-based rating and research firm Weiss Ratings warned investors that Bitcoin (BTC)’s falling price, in addition to stock performance, rising interest rates interest and policy changes from the Federal Reserve could turn crypto mortgages into a losing bet.
In the report released in May this year, Weiss analyst Jon D. Markman urged caution with these types of mortgages, citing the poor performance of stocks and cryptocurrencies this year, a housing bubble in the United States, the rising interest rates, and upcoming policy changes by the Federal Reserve.
“The product looks like a profit, assuming real estate and cryptocurrency prices continue to rise […] except there are signs that both bets are unlikely to be winners in the short term. Bitcoin is down 40% since hitting $66,000 in November 2021.”
By Audy Castaneda
