558: Bitcoin’s Rise as Collateral in Traditional Finance

Facebook

Google

Twitter

Podcast: Download

Watch on YouTube:

Transcript

Disclaimer: This transcript was generated by AI and may not be 100% accurate. If you notice any errors or corrections, please email us at [email protected].

If you have Bitcoin and it’s a significant portion of your net worth, that needs to have some type of weight in the decision whether to give someone a mortgage, right? A lot of clients we see, uh, may not be able to qualify conventionally. Does that mean that they can’t buy a home? No, they could buy a home.

They would just sell their Bitcoin. A lot of them did sell their Bitcoin a long time ago, and because they sold their Bitcoin, they may own a home today, but the value of that Bitcoin’s up five times. That’s actually turned out to be a very costly financial decision for them.

Welcome, everybody. This is Buck Joffrey with The Wealth Formula podcast, coming to you from Montecito, California. Today, I wanna talk to you a little bit about Bitcoin. Hopefully, you are not getting sick of this topic, and hopefully you are not ignoring it, because I’m amazed at how many sophisticated investors still dismiss it as a purely speculative asset.

Now, the reality is that whether you like Bitcoin or not, personally it- it’s not even the point anymore. The question is, what happens to the price of an asset with a permanently fixed supply when institutional adoption accelerates? Because that’s exactly what’s going on right now. Let’s start with the math, okay?

There’s only ever gonna be 21 million Bitcoin. Not approximately, not around. There’s 21 million, and several million are believed to be permanently lost forever. Meanwhile, demand continues to expand at a remarkable pace. According to recent estimates, there are now 559 million crypto users globally, approaching 10% of the world population.

And of course, institutional adoption is accelerating even faster. That’s the amazing part. As of this year, s- spot Bitcoin ETFs, they’ve accumulated roughly $100 billion in assets under management. That’s, uh, in a very, very short period of time. And remember, these ETFs has only been launched since 2024.

And BlackRock alone has become one of the largest holders of Bitcoin in the world through its ETF products. Now, we’re talking about BlackRock here. Now, they manage roughly $10 trillion in assets globally, right? So this is no joke. And Larry Fink, who heads up BlackRock, he was a guy who openly criticized Bitcoin at one time, now refers to it as a legitimate alternative asset class and even a potential hedge against currency debasement.

The point is, this is not fringe anymore, and you can’t treat it that way, whether you like it or not. And here is where the supply-demand imbalance becomes really interesting, because after the most recent Bitcoin halving, annual new Bitcoin issuance dropped to about 164,000 Bitcoin per year. Now- Estimates suggest corporations, institutions alone now hold over a million Bitcoin combined, and Michael Saylor and team over at Strategy are buying more than that amount of Bitcoin in a year.

So in other words, institutional demand is already consuming supply at a pace that dramatically ex- exceeds new issuance, and that matters a lot. Now, think about Bitcoin in the context of global wealth. Gold currently has an approximate market capitalization of 20 trillion. Bitcoin fluctuates closer to 1.5 trillion.

So if Bitcoin merely achieves parity with gold, I mean, I say merely, but if it does and when it does, you’re talking about a potential order of magnitude increase from the current levels, and some very serious people are beginning to think that that may even underestimate the real opportunity. So again, Larry Fink, BlackRock guy, suggested that if sovereign wealth funds globally decided to allocate 2 to 5% into Bitcoin, prices could theoretically move into the several hundred thousand dollar per coin very, very quickly.

Again, you don’t have to like Bitcoin, you don’t have to agree. But you can’t ignore this stuff because Bitcoin is no longer sitting outside the financial system looking in. It’s slowly becoming integrated into the plumbing of the system itself. That integration is where things really start getting interesting, because historically, assets become truly institutional once they can become borrowed against, lent against, securitized, collateralized, and incorporated into traditional underwriting systems.

And that is exactly what is, uh, happening with Bitcoin right now, and this week’s podcast is a very tangible example of that transition, uh, uh, already. I’m going to be talking here momentarily with Joseph Ropina, who’s founder of Milo, and what they’re doing is pretty fascinating. They’re building crypto-backed mortgages that allow investors to purchase homes without selling their Bitcoin holdings.

Think about the implications for that for a moment. Traditionally, if someone wanted to buy real estate using appreciated Bitcoin, they had to sell the asset, trigger taxes, lose future upside exposure, and convert back into the traditional banking system. And Milo’s, uh, system changes that. In fact, what you’re gonna hear about is how Fannie Mae and Freddie Mac are, are looking at recognizing Bitcoin in the same way.

So this is not, uh, theoretical anymore, folks. Take it seriously. You may not in- interested in Bitcoin, but you gotta know about it And, uh, we’ll have that interview right after these messages. Hey everyone, if you haven’t done so, make sure you sign up for Investor Club. Investor Club is Wealth Formula’s private investment community.

All you need to do is to go to wealthformula.com and sign up for free. And if you are an accredited investor, you’ll get an opportunity to quickly do some paperwork and meet one-on-one with me and get onboarded. And once you do that, you get access to all sorts of potential private deal flow that you can only see if you’re part of the club.

So join now. Join Investor Club at wealthformula.com.

Wealth Formula Banking is an ingenious concept powered by whole life insurance. But instead of acting just as a safety net, the strategy supercharges your investments. First, you create a personal financial reservoir that grows at a compounding interest rate much higher than any bank savings account.

As your money accumulates, you borrow from your own bank to invest in other cash flowing investments. Here’s the key. Even though you borrowed money at a simple interest rate, your insurance company keeps paying you compound interest on that money, even though you’ve borrowed it. Net result, you make money in two places at the same time.

That’s why your investments get supercharged. This isn’t a new technique. It’s a refined strategy used by some of the wealthiest families in history, and it uses century-old, rock-solid insurance companies as its backbone. Turbocharge your investments. Visit wealthformulabanking.com. Again, that’s wealthformulabanking.com.

Welcome back to the show, everyone. Today, my guest on Wealth Formula podcast is, is Josip Rupena. He’s the founder and CEO of Milo, which is a fintech company pioneering, uh, crypto-backed mortgages and alternative lending solutions. He’s got a background in investment banking and real estate finance and is focused on bridging, uh, digital assets with traditional, uh, financial systems.

Uh, welcome to the show.

Yeah, thanks for having me on. It’s great to be here.

So, you know, one of the reasons, uh, your background got me interested in, in talking to you is that there was recently a very interesting situation where Fannie Mae actually made a, made a big move. Do you wanna talk a little bit about what they did?

Yeah. So, um, yeah, so Milo’s the company I started, you know, many years ago in 2019, and we actually came out with the first, uh, crypto-backed mortgage in, uh, in ’22. And, uh, you know, we’ve been trying to convince the whole world of the merits of people wanting to buy homes that have, that have Bitcoin. And, um, you know, recently there was an announcement that, um, you know, some of the loans that originated for clients that have Bitcoin could be delivered and sold to, uh, to Fannie.

And, um, you know, we always thought that that would be really important. You know, the significance of, um, being able to underwrite Bitcoin is, is huge and, um, you know, we think that it’s a start. You know, we think it probably should go a little further than what they did, but nonetheless, I think it’s a great, great, uh, great direction we’re heading in.

So just, you know, and, and I wanna hit Milo and what you guys are doing, um, specifically in a moment. But wasn’t there, isn’t there now an ability or at least talk that you could put your down payment down with Bitcoin?

Yeah, so the, so the structure, uh, as it came out is individuals that want to access this mortgage would need to qualify conventionally, so just like any other mortgage.

And now their ability to, from a down payment perspective, to take out a second loan or, you know, call it a, a piggyback loan, um, that, uh, is backed by Bitcoin, and you can use the proceeds of that to be able to fund your down payment. Um, but the Bitcoin itself is not being used to underwrite the underlying mortgage.

You still need to qualify conventionally. So that is a little bit of kind of what I was highlighting, that I would’ve liked it to have gone a little further, um, similar to the way that we think about underwriting a consumer because they have Bitcoin in this case. Um, the only consideration for the Bitcoin is to be able to borrow against your Bitcoin for your down payment.

Yeah, the other thing I had thought was interesting was that there is protection, I guess, just from the volatility of Bitcoin. If you use Bitcoin as a down payment, you know, the worry there, of course, is it go, you know, goes down another 50 or 75% and the next thing you know you’ve got, you get liquidated and now what do I do?

Yeah.

They put some protections in there for that too, didn’t they?

Yeah, to be able to not have the aspect of, of margin calls, um, or the event of the collateral going down. Um, I think that that was what was proposed in concept. Um, you know, we’ll see what happens once they actually roll out the, the product and people start, start accessing it if, if that’s still a, a possibility given the amount of collateral that, that is being required for it.

Um, you know, I will say that, you know, we’ve done over $100 million in, in crypto mortgages, um, and we have yet to margin call anybody, and we started doing this in January of ’22. Um, primarily because the collateral can go down pretty significantly and Bitcoin hasn’t eclipsed those levels. So, um, even though our structure has margin calls, we’ve yet to margin call anybody, which has always been a very, very big concern for people that the value of Bitcoin dropping means that you might, uh, you might get margin called, um, but it doesn’t mean you, you lose your home.

It just means that you might have to post more collateral, um.

Right. Which if you don’t have, then you might lose your home, unfortunately, right?

No, you won’t lose your home. In, in our structure, the way that it plays out is that if the value of the Bitcoin goes down, let’s say in our case 65%, um, at that point in time if you can’t post any more collateral, then what we’ll do is it will liquidate the remaining collateral and reduce your overall loan to value from 100% down to 70%.

And as long as you continue to make monthly payments, you’re fine. So what we have done is essentially we’ve given the consumer time value, where they’re choosing not to sell their Bitcoin in the beginning- Now the value of the Bitcoin has gone down. You know, we can’t control the value of a Bitcoin going down, but then at that point in time, if they wanted to get a mortgage, they’d probably be selling their Bitcoin anyways.

So it’s not as, um, I would say catastrophic or dramatic as people might make it out to seem, the fact that if the value of my Bitcoin goes down, I’m gonna lose my home. No, it just means that, you know, we’re gonna liquidate the collateral and you’re gonna have a regular mortgage just like everybody else.

Just again, going big picture first before we get, you know, too in the weeds of Milo, and I do, and I will, you know, get back to that ’cause I know you wanna talk about what you’re doing. But just in the big picture here, again, with this whole Fannie Mae acknowledgment, if nothing else, right? Does that mean in your mind, in what, uh, from, from people in your industry that, you know, Bitcoin has sort of crossed this line from, I don’t know, uh…

I mean, it’s, it’s continuing to do so every day, where it’s becoming looked at less as a, some sort of speculative, uh, asset where, you know, people start joking about tulips and all that and, um, to something that’s systemically relevant as collateral.

Yeah. Yeah, I mean, it, it’s very significant. You know, I think that, that that element of being able to buy a home and, you know, not have to sell your assets or have it to be considered for, for the transaction is, is really, really significant.

You know, I think that, you know, an indi- uh, you know, Fannie and Freddie are the largest buyers of mortgages in the world, not just in the United States, but in the whole world, right? On any given year, they, they may buy on the low end at $1.5 trillion in mortgages, and on the high end, right, it might be $4 trillion, right?

So there’s… The mortgage market is, is massive. Um, the other significance is it’s not easy to change guidelines of how mortgages have been underwritten and, and, and issued over long periods of time, primarily because mortgages are 30 years. So it takes a long time to collect enough data to actually change guidelines.

Um, you know, Bitcoin’s been around 15 years, so it’s taken a long time to get to this point. Um, but the fact that now it is going to be part of the overall consideration, you know, however in depth it is, whether it’s for underwriting or guidelines or down payments, it’s significant because this will stay, it, it will stay in that file, and it will continue to pull forward, and that means that we can continue to push the boundaries to build better versions of products.

Um, so you gotta start somewhere, and I think this is that somewhere, um, and, uh, and continue to push things forward.

So do you think… I mean, what does, and again, like, not, not necessarily diving into what Milo has right now, but what, what does full institutional acceptance of this look like to you in, if, you know, from a, from a collateralization standpoint?

Yeah. So, so in my mind, you know, if you have, if you have Bitcoin and it’s a significant portion of your net worth, that needs to have some type of weight in the decision whether to give someone a mortgage. We, we think that’s really important, and it’s more important for people that have a significant portion of their net worth, right?

A lot of clients we see, uh, may not be able to qualify conventionally So in that case, does that mean that they can’t buy a home? No, they could buy a home. They would just sell their Bitcoin. Well, for a lot of individuals that we’ve worked with and, and, and haven’t worked with, a lot of them did sell their Bitcoin a long time ago.

And because they sold their Bitcoin, they may own a home today, but the value of that Bitcoin’s up five times. So it’s not just a decision of can they buy a home, it’s a decision that they made a decision to sell their Bitcoin to buy a home that’s actually turned out to be a very costly financial decision for them.

And as this asset continues to increase, um, it becomes even more significant that I think we owe it to a whole set of US consumers, in that case, right, over 50 million US consumers that now own some form of digital assets, to probably have the right solutions for them. Especially as this generation’s desire to hold Bitcoin and other things is something that’s more important than it was may- you know, it didn’t exist, you know, 15 years ago, right?

So now we gotta change with and adapt with the time that this is a significant portion of people’s net worth.

I’m curious in, in terms of Bitcoin and as acceptance as collateral in general, outside of even real estate. You know, you think about all the money that’s sitting out there, money markets and all that, but there’s also, like, you know, couple trillion dollars of Bitcoin that is extremely diffi- difficult to, to use.

Do you, do you see… I mean, what signs do you see that continue to open the doors for collateralization and monetization of Bitcoin? Yeah.

I mean, I think it’s the ad- the, I would say, the evolution of the institutionalization of the space and the asset class. Because I think the desires of, for example, someone that has Bitcoin that wants to borrow dollars against their Bitcoin, that idea has been around since 2015, and there have been many companies that did that in the early days, and unfortunately, a lot of them are not around today.

And not so much because that basic idea of that product was bad or f- or had flaws. It’s the fact that the decisions that they made because of the institutions that they could work with at the time and how they decided to set up their business is what got them into trouble and unfortunately caused them to lose customers’ assets and file bankruptcy, which has created, um, a crisis of trust from counterparts and custodians.

Because if you look at someone that borrows dollars against their Bitcoin, it’s no different than someone going to Morgan Stanley or any broker-dealer and borrowing against their Apple stock. You’re just replacing Apple stock with Bitcoin, but you’re borrowing dollars. The value of Apple stock going down would mean that you’d have to post more collateral.

So the idea of Bitcoin-backed loans is not a new concept. It’s the s- it’s the same concept that we’ve been doing for a long time in the equity markets. We are just basically replacing the asset And replacing who the custodians are of where those assets are held, which now as the industry is adopting more institutionalization, as you start to have more banks come into play, it probably makes the, um, lending market grow as well as more people view this as the right tax, um, strategy to, to, to borrow against their assets and access dollars.

How, why is it that… You know, and I’ve noticed just in terms of, like, Bitcoin-backed borrowing, it’s still very expensive, which to me is a little surprising because, I mean, if, especially with the lenders who have this ability to liquidate quickly-

Yeah …

why do these rates need to be that high? ‘

Cause it’s not a function of risk, right?

Like, credit is not a function of risk all the time, right? Because if you, if that were the case, you would say, okay, a mortgage should probably be at 1% interest rate if it was just purely off risk, right? You’ve got a home. You can liquidate that. Problem is not that. The challenge is that there’s a natural cost of capital in the market.

And today, in the U.S., riskless market is Treasuries and T-bills, and that’s roughly about 4%. So then now you say, okay, well, now if you’re taking an alternative view, in this case you have capital that is gonna go to a crypto loan, you need to be able to make a spread and a margin, which means now you need to borrow against that, and now you need to have a spread on top of that.

The biggest challenge is that in other markets, like mortgages and consumer loans and auto loans, you have an institutional market that allows you to securitize these loans, and you could borrow at much more attractive levels because they get rated by their rating agencies. In crypto loans, you don’t have that because banks don’t provide capital to lenders to go out and make these loans, which means that the cost of capital that they need to access is far higher than they would in a traditional sort of established lending market.

So it’s not that there’s more risk, it just means that the capital that’s needed isn’t coming from banks where they can provide a much lower funding cost.

Do you think, do you think that changes, though, with, like, you know, the CLARITY Act and all that?

It is changing. It is changing. We’ve had a lot of relations because we have relationships with banks and warehouse facilities and, and, and a lot of people that we’ve talked to over the years about trying to give us facilities.

And the biggest challenge has not been that the banks don’t want to do it, at least in the last year, or that they can’t do it, which was the case prior to a year ago. The challenge today remains that Basel forces them to have to keep a certain amount of haircut capital on their balance sheet for these loans.

It makes it uneconomical and unviable for them to do that. So they have to hold significantly more collateral, whereas if they hold a mortgage, they only have to hold a s- a very small percentage of haircut capital for a mortgage, so it’s really efficient and they can get their leverage. They can’t get the leverage on a crypto loan today because of Basel, because it’s Bitcoin related, which causes more capital on their part.

So in that case, for them, they need to hold 1,200 times- The amount of the loan balance. So 12 times more. So if you give out a $100 loan, they need to hold $1,200 in reserve capital for that loan. You couldn’t possibly-

Oh, okay …

make that viable, right?

Yeah. D- do you see that changing? I mean, with, with some of the legislation going through?

There’s discussions, yeah. Yeah, yeah, there’s definitely discussions about that, that it doesn’t make sense to have this, this, this policy in place anymore. Um, so I think that banks will come into the space. The question is, will they lend to companies like ours and others, or will they lend directly themselves?

It’s a question of who has the customer relationship, and that should bring rates down, right? Today our rates that we lend at are roughly around 8%. Um, you know, that could be lower. Our mortgages today are somewhere in the 6%, right? Primarily because the mortgage market is, is just more, is more efficient.

Yeah. Okay. Well let’s, let’s dive into Milo now. Okay, so talked a little bit about some of these new Fannie link structures that, you know, may come through. How is Milo different? Why don’t you work a sort of soup to nuts and, and, and, and tell us exactly what you’re doing there.

Yeah. So what, what we’re doing is that we’re helping people buy homes, and what we were really trying to solve for is that we know that a lot of our clients don’t want to sell their Bitcoin.

So we wanted to solve for helping people finance 100% of their purchase. So in a regular mortgage, you’re gonna put a 30% or 20% down payment. You’re gonna qualify based off of your income docs. You’re gonna have to have W-2 income. You’re gonna have to have really nice income. And if you do and you’re buying a home that’s, let’s say, $900,000, you’re gonna be able to access a, a mortgage from, from Fannie.

What we realized is that our customers don’t have a lot of cash and they don’t want to sell their Bitcoin. In that case, we have to finance 100% of it. So in order for us to finance 100% of it, we knew we were taking a greater amount of risk because the customer wasn’t putting any dollar down. So we said, in that case, the only way we can get comfortable with this is you have to give us some more collateral, in this case Bitcoin, because they didn’t want to sell it anyways.

They’re comfortable giving us their Bitcoin. So in this case, what we did is we created the first dual collateralized mortgage. We have a lien on the property, and there’s Bitcoin as well. If they can’t make payments, we can sell a little bit of Bitcoin. We don’t have to foreclose, which is always very costly.

And if the value of the collateral goes down, they can post more. And if they can’t, then we just de-leverage the loan. But a big part of us in our process was using that Bitcoin to help underwrite them for the mortgage, because a lot of our clients don’t have traditional income. So we felt that we solved a really big pain point.

And as interest rates continue to come down, it becomes more attractive for our customer. The first crypto mortgage we did, we actually did it at 4%, which today 4% seems really low ’cause most mortgages are 6.5%. But rates ebb and flow, right? So we, we expect that to continue with that.

Y- you were, you were mentioning, um- Like, um, you know, the recognition of a balance sheet, a Bitcoin on a balance sheet for, for clients.

That actually changed too, like, uh, with Fannie and Freddie, right? I mean, now aren’t, aren’t they required now to, uh, to, to, to, you know, accept that as part of your net worth?

So I would say that the only real adjustment that has been made by Fannie, it’s not that it’s helping to underwrite. They’re not giving you credit from a debt-to-income perspective.

It’s that you can now use some of the Bitcoin that you have to sell it and put it as a down payment. And in the past, you would have to sell it in anticipation of that. You couldn’t reflect that prior to closing. So there isn’t a guideline change that has happened by Fannie yet. I think that that hopefully is what comes next, is that you can actually start to use that for, for, for more qualification aspects.

Um, and that was one of the reasons why we had to come out with our product, because a lot of our clients couldn’t sell or had to sell, and they had to sell their Bitcoin- Right … in anticipation of, of qualifying.

Okay, so I come to you, I come to Milo and I say, “Milo, I, um, oh, there’s a $2 million house I want to buy and I have $2.5 million of Bitcoin.

Is that enough? How much Bitcoin do I need to have?”

Yeah. So right now we’ve got a couple variations of our product. So in the highest loan-to-value, meaning you want 100% financing, you need equal amounts of Bitcoin. You want to buy a million dollar home, you need a million dollars of Bitcoin. Now, some of our clients want to put a down payment.

So as they work their way down and they put some cash, they need less Bitcoin, up until the point where we actually have the next innovation that we created, which was the self-custody Bitcoin mortgage, because a lot of our clients have a bunch of Bitcoin, but they have enough to put a down payment. In that case, we underwrite them for the mortgage based off of their Bitcoin.

And we’re seeing a lot of our clients actually use that because they have enough Bitcoin, they just don’t have enough income. So that, that’s also- Okay … become very popular. So

in that, in that scenario, they’re not actually, they’re not using any, they’re not using any Bitcoin. They’re just saying, showing you that they have Bitcoin-

Correct

for the net sheet. So we’re authenticating that they have the Bitcoin. We’re doing test transactions, right? We, we are documenting and validating that that is in fact theirs, and we can help underwrite them for the mortgage in that case. But because they’re putting a down payment, we feel more comfortable where we don’t need to take Bitcoin from them, but we are helping qualify them by considering it for, for the mortgage.

Which is very unique- Okay … because a lot of, uh, in a traditional sense, right, that’s not possible today.

Right. Okay. So let’s go back to actually, uh, buying, essentially buying your house with Bitcoin and not using cash. So one to one, if you want a $2 million house, uh, or whatever, then you need $2 million worth of Bitcoin.

Mm-hmm.

Right?

Correct.

Okay. So I go and how does it work then I… W- where is the custody and how does that work and how safe is that?

Yeah. So our clients today, you know, like typical mortgage process, they’re gonna come in, they’re gonna get pre-qualified. We’re gonna look at their assets. They’re gonna get a pre-qualification letter.

They’re gonna be able to use that to put an offer. Once they get that home under contract, they’re gonna come back to our site and they’re gonna enter their information. They’re gonna get their offer. They’re gonna be able to sign all their documents, disclosures, everything you need, right? We’re playing under a mortgage-regulated landscape.

One of the things that they need to verify is the amount of collateral that they have. So they’re gonna send us test transactions. We’re gonna authenticate that. That is gonna go to one of our qualified custodians. We work with both Coinbase and with BitGo. That’s third-party qualified custodians, and that’s where the Bitcoin is going to live for the duration of, of the loan.

Um, we’re gonna do appraisals, title, insurance, everything that you need in a normal mortgage process. And then eventually, when we’re ready to close, once they’ve gotten their conditional approval, we’re moving to closing, that’s when they’re gonna transfer the rest of their collateral, um, for the loan at that point in time.

Now, during the life of the loan, once we close, they deposit more collateral. If the value of the collateral goes up, they can request collateral to go back. If the value of the collateral goes down, they can deposit more collateral. If they want to sell some of the collateral, they can sell some of the collateral.

We’ve got a very comprehensive servicing suite and portal for them to be able to manage their collateral through the life of the loan.

Okay, so basically and, and what you’re saying there then is, okay, I, I, I gave you $2 million worth of Bitcoin. I bought a $2 million house. Three years down the line, whatever Bitcoin is, uh, my Bitcoin is now worth 6 million bucks.

I can, at that point-

Take some

back … can I refinance essentially?

Yeah.

Yeah. You, well, you, you could. You could, you could take some of the collateral back. You can use some of the collateral to pay down the loan. We’ve seen every example of this. You know, real world example. Client a few years ago took out a $3 million loan with us, gave us $3 million of Bitcoin.

Sold the home two years into it. We gave him back $12 million of Bitcoin, and he sold the home for $4 million, and he put zero money down. So- You

paid him, you paid him back in Bitcoin rather than-

Well, because his Bitcoin, when, when someone sends Bitcoin, let’s say they send us 10 Bitcoin, we’re sending back 10 Bitcoin.

Now, that 10 Bitcoin at the time was worth 20,000. When we gave it back to him, it was worth $100,000. But all of that gain and appreciation belongs to the client. It doesn’t belong to us.

When you g- when you give them back the Bitcoin, that’s not a taxable event either, right? No. Because it was just held as collateral.

No. That’s, that’s the benefit of the product is that it’s not a taxable event. That’s the reason for the client to do this, because if you were to do this at inception, in your case, that $2 million home, and you, and a lot of our clients did this prior to Milo. They sold $2 million of Bitcoins. But they didn’t sell $2 million of Bitcoin.

They needed to sell 24% more if you’re in Florida. If you’re in California or other states, maybe 50% more. So they had to sell $2.6 million of Bitcoin. Now, that $2.6 million of Bitcoin, if it appreciates, it becomes a really expensive decision. On our website, we actually have a calculator Where you can put in the price of Bitcoin, the value of your home and all of that, and you can see what is the actual impact of this, uh, opportunity for them.

Because it’s, it’s not so much of are you getting a mortgage like another mortgage where it’s apples to apples. It’s really about what are the savings you get from not having to pay taxes to sell your Bitcoin for that down payment, and then how do you actually now continue to… Your Bitcoin continues to grow while you hold this home.

And if you didn’t put any money down, that’s one of the greatest ways of creating wealth in real estate, is by leverage. So in this case- Right … we’re financing the whole transaction for, for a client.

You know, obviously that’s the ideal situation, right? That’s the ideal scenario, is all of a sudden you just effectively used your house as collateral, you know, put your down payment on.

You… At this point right now the rate, the mortgage rate is 8%, you said?

No, it’s lower. Um, it’s around, you know, 6 to, 6 to 8%. But it, it… I, I would say probably the last one we did is probably somewhere like low 7%.

Low sevens. And is that, that rate obviously is gonna fluctuate based on what SOFR or-

Yeah, based off-

the 10-year … of SOFR, where the, where the 10-year is. You know, where, where it fluctuates, right? Like back, like I mentioned, right, before we did some at 4%, right? So that, that, that tends to, that tends to fluctuate.

Are the mortgages typically always sort of IO, interest only, fixed or- Yeah … how does that work?

Yeah. So they’re fixed rate interest only, uh, for the first 10 years, and then they amortize for the next 20 years.

Got it. Okay. So we talked about that great scenario where things just went right, made a bunch of… You know, you, you pulled out, uh… Oh, by the way, the payments that you’re making are in cash.

Correct. 80%.

Yeah, so you’re making monthly payments. Um-

Yeah. Yeah. Okay. So the a- alternative is Bitcoin stays… Well, there’s two alternatives. Bitcoin stays flat for a bunch of years. In that case, you’ve basically, you know, it is what it is, right?

Mm-hmm. Um, you haven’t lost anything. But then all of a sudden, I would like you to go over again sort of the scenario of that

$2 million house, and all- Yeah

of a sudden Bitcoin dropped by 50%. How… First of all, how quickly are you going to be moving in terms of asking for some sort of, you know, LTV ch- loan-to-value change call or whatever? Because as you and I both know, that, that could last three weeks. Yeah. It could last a year. You know, that kind of thing.

So how quickly-

Yeah …

is, is there a movement that needs to be made?

Yeah. So in that example, that $2 million of Bitcoin has now gone down 50%. It’s worth a million. Nothing has happened. There’s no margin call, because the value of the Bitcoin needs to go down 65%.

It needs to go down 65%?

65% margin. Be- before there’s a margin call.

Okay. Because that’s the combination of both the real estate and the Bitcoin- In one transaction- Yeah … that we have more collateral, right, within, within the transaction.

Yeah.

Let’s say we are getting closer to the 65%. Clients have a portal where they can monitor their collateral. Tells you how much collateral you can deposit, how much you need to deposit, how to get your loan healthy, and the customer then basically knows what those levels are.

They’re gonna get a warning. If you’re getting close, they can deposit more. Let’s say in the event they can’t deposit more, what’ll happen is that we’ll sell the remaining collateral, right? In this case, 700,000 is the remaining collateral, and that $700,000 is gonna go to pay down the $2 million balance.

So now you effectively have sort of re- almost sort of like refied into like a conventional loan.

Correct.

Where you have like, you know, whatever the 30% down- You put a down

payment. Right. It’s a different risk for us. In that case, by doing it that way, we’ve now de-levered our position because now we don’t have as much collateral left anymore.

And as long as a person continues to make monthly payments, nothing has happened. So the customer now had Bitcoin. Now what they have is equity in their home. So they swap Bitcoin exposure for equity- Right … exposure in their home.

And then the downside in that, of course, is now you’ve, you know, you’ve liquidated your Bitcoin, now you’re gonna take a loss on that and whatever, you may have to buy it somewhere else.

It just depends what your basis is at that point in time, right? You know- Mm-hmm … what your cost basis was. For some clients, yeah, that could trigger some tax consequences, and for others, maybe they would’ve bought Bitcoin at higher levels and it may not trigger a taxable- Mm-hmm … event and it might just be a taxable loss, right, that they can harvest.

Right. Uh, and then what happens to the rate at that point?

Stays the same. Same rate. Doesn’t, doesn’t change.

Okay. So effectively the, the payment would remain about the same too?

The payment’ll go down because now you have a smaller amount of principal, so your payment, your monthly payment will go down.

You f- your- And then now- Before your balance was two million, now you’re financing a smaller balance. Now you’re financing 1.3.

And but the rate doesn’t change even though now you don’t have the Bitcoin piece as collateral.

No.

Right?

No.

Okay. So if you needed to, I guess you could refi or whatever at that point.

Yeah, one,

one of the big things that we thought about the product is just to create predictability and consistency around the terms, right? Yeah. Like, we didn’t want fluctuating terms by interest rates or the value of the Bitcoin, right? We looked at a lot of these concepts, and what we found is that that was, that’s incredibly difficult for someone to know what their monthly payment needs to be over a long period of time.

So we tried to keep the structure as simple as possible.

Yeah. I’m, I’m just kinda curious, like what other questions kinda come up from your, for B- Bitcoin clients that I might be missing.

I mean, I think a big one’s always just around custody, right? Around like, why do, why, why do we work with these custodians?

Why do we not work with others? And, you know, what we found is that when we work with Coinbase and, and BitGo because they’re two of the largest qualified custodians, you know, we keep collateral in cold storage. We keep it, you know, in, in a, in a safe way, right? There’s insurance behind them. Right? These are, these are not things where we wanna have direct custody ourselves with, you know, private keys and things like that, right?

Like, we wanna trust the, the proven companies that have been around for a long period of time and, you know, they’re, they’re holding a lot of Bitcoin for the ETFs and public companies. But, you know, that’s always, that’s always a, a big one, and that was one of the reasons why we came out with the self-custody version of the crypto mortgage because some clients, that’s, that’s so important for them.

And said, “Well, you know, we still wanna be able to help you get a mortgage. We just have to solve a different, something different for you.” Yeah. In this case, it’s Qualifi.

Right. Interesting. So are you getting, um… Are you seeing this area, are you starting to get some competitors and, you know, all that? Is that, this area growing pretty quickly or what?

Yeah. I mean, I think there’s more people that are, that are talking about, you know, coming into the space and looking at it and, you know, I think that that’s, that’s exciting because we’ve been, we’ve been thinking about this for, for a long time. I think it does help to create awareness, um, amongst people that have Bitcoin, right?

You know, we, we’re, we’re not the size and scale of a company like Rocket that spends a billion dollars a year on marketing, right? To, to create the awareness. But, you know, hopefully if more people talk about this, that’ll be, that’ll be great and, you know, people will come up with different ideas of how to tackle this problem, and I think that that’s gonna help all of us, um, you know, refine, improve, and, and see that hopefully the best ideas are the ones that, that the consumers get the most benefit from.

Interesting stuff. So, uh, thanks, uh, so much, uh, for being on the show. Tell us, uh, how to find out more about Milo.

Yeah. Absolutely. Yeah. So our website’s, uh, milo.io. Um, there’s a section there that says how it works. You know, it can… It goes over a couple of our different products. We’ve got both, you know, a crypto mortgage product and a crypto loan product.

Uh, and also there’s, uh, a calculator there that allows you to, uh, be able to run these different scenarios that I, that I talked about and, um, you know, just great educational content as well as- Yeah … blogs and testimonials.

Just to be clear, you’re not just doing just mortgages, you’re doing straight-up loans too?

We do both. Yeah. We have both a mortgage product and a loan product, and the reason why we were doing the loan product is because people were already using that for down payment loans- Yeah … for Fannie loans. If they qualified conventionally, they could get the loan from us, or if they wanted to buy land, they could get the loan from us.

So these were things that we saw that were already things that customers could use because we honestly didn’t expect Fannie to move quickly given the size of that institution. So we ended up building some of these pieces already, right? To, to alleviate and, and help customers.

Yeah. Just out of curiosity, like, so obviously you’re probably still using Coinbase or whatever for, for custody in those situations.

Like, what would be the difference, like, just taking a loan directly from Coinbase versus- Yeah … you guys?

Yeah. I mean, I think that right now, you know, Coinbase has this integration into Morpho, and Morpho has, you know, very, very attractive rates. Um, I think one of the challenges with, with Morpho has primarily been also that a lot of our clients that use- Um, the loans for their down payment, they can’t sell the collateral within that pool to pay down the loan.

So that’s a really big one because a lot of our clients, you know, once they put the money for a down payment, that goes into their home. It may be very difficult for them to come up with two, three, $400,000 in a down payment. So in that event that their Bitcoin goes down, they’re gonna be liquidated in, in a, in a Morpho loan.

Where in our case, we can help them de-leverage by selling some of the collateral within the loan to, to be able to, to, to qualify. Um, the other thing that we’ve seen is that those rates have been generally pretty volatile. Right now their rates were low, but at one point they were higher. And then, you know, if you wanna have a transaction where you wanna know how much you’re paying, you know, you wanna have some type of consistency in it.

Um, so today maybe those loan rates are attractive. Um, they might be higher in, in, in the future. So they are good loan products and we are seeing a lot of people use them. Um, what we’ve just found is that some people want some type of, you know, definitive predictability. They also wanna be able to pick up the phone and talk to someone, right?

If, if there are situations and stress and margin calls, “Here, I need a little bit more time. Please don’t sell my collateral out.” Right? All of these things that, you know, I think become really important and sometimes, you know, there’s a little bit of concern just facing code, right, and software and DeFi.

Um, so just different products for, for different risk levels.

Yeah. Thanks so much again for being on the show. Uh, it’s been really interesting.

Yeah. Thanks for having me on. Pleasure.

You make a lot of money but are still worried about retirement. Maybe you didn’t start earning until your 30s and now you’re trying to catch up.

Meanwhile, you’ve got a mortgage, private school to pay for, and you feel like you’re getting further and further behind. Now, good news, if you need to catch up on retirement, check out a program put out by some of

the oldest and most prestigious life insurance companies in the world. It’s called Wealth Accelerator, and it can help you amplify your returns quickly, protect your money from creditors, and provide financial protection to your family if something happens to you.

The concepts here are used by some of the wealthiest families in the world, and there’s no reason why they can’t be used by you. Check it out for yourself

by going to wealthformulabanking.com. Welcome back to the show, everyone. Hope you enjoyed it. As you know, I, uh, I do believe in Bitcoin. I do believe this, you know, fixed amount of Bitcoin and this massive amount of adoption is inevitable in terms of leading to higher numbers.

Um, I do believe that right now Bitcoin is one of the few assets, including multifamily real estate by the way, that is, is get… It’s, it’s underpriced. So if you’re still interested in getting in, think about it. And, you know, I think it’s sitting around 80 grand today. Don’t be surprised if it goes down to 60.

Don’t be surprised if it does, but it may not. And don’t be surprised when it hits 250. That’s just what Bitcoin does, right? Huge volatility, but huge opportunity. One thing’s for sure, it’s not going anywhere. You know, Bitcoin either goes to zero or it goes to a million, and it’s not going to zero. That’s it for me this week on Wealth Formula Podcast.

This is Buck Joffrey signing off. If you want to learn more, you can now get free access to our in-depth personal finance course featuring industry leaders like Tom Wheelwright and Ken McElroy. Visit wealthformularoadmap.com.