Blockchain based platforms and cryptocurrencies are new disruptive technologies that provide alternative methods to increase your net worth and safeguard it, among other services. Until this Tech 3.0 wave, our wealth could only be held as cash in bank accounts, antique cars, stocks, bonds, real estate, art and so on. Blockchain is disruptive because it was designed to do away with purely centralized organizations though community-based decentralized platforms that allow transactions to be recorded on a distributed electronic ledger. In banking, it replaces the need for a centralized bank to house account books to record your assets, or to transact (say to send money from New York to Switzerland), cutting down on expensive and slow back-end technologies. The technology architecture created during Tech 2.0 created unintended costs, where competing organizations house closed (private) databases and make it expensive to interact with other organizations or for people to own their data. Features of the blockchain make these interactions easier, where its decentralized digital ledger allows assets to trade in tokens (cryptocurrency), creating new and unique liquid models.

Bitcoin has become synonymous with the blockchain because it was the first cryptocurrency that reached scale. At its core, Bitcoin blockchain’s creator Satoshi Nakamoto was successful in combining 4 breakthrough technologies:

1) cryptography;

2) decentralized distributed ledger;

3) proof of work; and

4) peer-to-peer networking.

Cryptography

Cryptography, or “crypto” as the cool kids say, has been around since the 19th century. Cryptography is used to encrypt the data passed within the Blockchain using a series of letters and numbers that to a human looks like a long string of mumbo jumbo. When transactions are completed in cryptographic locks, a mathematical algorithm is used to safeguard information. Current computing power would not allow for them to be hacked. Because they are impossible to remember, people often use wallets to keep their keys. For you to receive Bitcoin you provide your wallet’s Public Key, this key provides the information needed to identify your wallet without providing any other information about you, your account, or the sender.

Your Public Key “unlocks” your account making it possible to send and receive money. You should never share your Private Key as that is similar to a password but much more, it’s a key that has delegation to send and receive money from your wallet, in a decentralized world only you hold your Private key, not a bank, and if you loose it you have to get a new wallet.

Decentralized Distributed Ledger

Distributed ledgers designed to arrive at the truth by requiring consensus amongst its participants (miners) has allowed the Bitcoin Blockchain to solve the fundamental problem of double spending — bad actors trying to pay multiple people with the same tokens. The double spending problem has been around as long as humans moved from bartering to money, that’s why we use paper money, when I hand you a dollar I no longer have it physically in my pocket anymore, so I cannot try to pay with the same dollar again. In digital transactions, banks must be trusted to ensure double spending does not happen by keeping ledgers in their centralized servers (cloud or physical server farms) and effectively communicating with the ledgers of credit card companies, merchants, and other banks. So a decentralized ledger is simply the idea of needing to reach consensus across peers on a peer-to-peer network, not within one database at a bank.

Transactions on the Blockchain occur in blocks of a pre-determined size that are chained together, which give it the name Blockchain. The content of each block, its ledger, is recorded on a number of autonomous computers across the globe, so the “truth” is arrived at through consensus of all the ledgers in a blockchain. Each individual ledger can be thought of as a bank account in which the value of an individual account is noted, additions and subtractions are recorded as transactions for each individual ledger (bank account) in a new block of the blockchain. When a transaction is set in motion, a majority of the computer ledgers must agree that the source account does in fact contain the funds it’s trying to send. This is known as a consensus algorithm. The next block records the transaction and subtracts the amount from the sender, and credits the receiver using each parties Public Keys.

Because transactions on the Blockchain are maintained on numerous computers across the globe the system is said to be “trustless”, or said differently, no one person or institution is trusted, instead a large community agrees on the truth. Also, because new blocks are created and none are erased, the data on the blockchain is said to be immutable, or can never be deleted or changed, only updated via new blocks.

Remember that this data is not being passed using plain language, instead its encrypted using cryptography rendering the process secure.

Proof-of-Work (POW)

The computers that produce the blocks on the Blockchain are said to be “miners”. In order to publish the next block, miners compete to solve cryptographic puzzles (a complex math problem), called “hashing”. The faster machines can solve the problems faster, thus computing power reigns king. The work that is done to solve each cryptographic puzzle is said to be the “proof-of-work” used to select which miner publish to the Blockchain. Miners are incentivized by “gas”, or a fee they receive for each successful block they mine. The speed at which they publish, demands different fees, currently blocks on the Bitcoin Blockchain are published in 10–60minutes. Because the cryptographic puzzles are increasingly more complex, more and more energy is used by the computers used to mine Bitcoin, this is criticized as a shortcoming of Bitcoin. New concensus protocols have since emerged to choose who publishes to a Blockchain such as Proof-of-Stake (and delegated Proof-of-stake). They are not fully secure as bitcoin’s just yet. For example Ethereum launched with a Proof-of-work model and will transition to Proof-of-stake per Ethereum founder Vitalik Buterin, but has not done so because he sees issues yet to be solved with Proof-of-stake.

Peer-to-Peer Networking

Peer-to-peer networking is the backbone that makes it possible to host distributed ledger across various computers, replacing the need for a central point of storage (for example Facebook’s cloud/physical servers, or Santander’s cloud/physical servers). Without this technology the distributed ledger would simply be a book of accounts across different computers that could not talk to each other because they lack a network and therefore could not reach consensus.

Peer-to-peer networking technology was first made famous by Napster in 1999, when it replaced the music industry’s distribution model of requiring the purchase of a CD to being able to access music hosted by thousands of computers across the globe. The model disrupted how we do business and technology. The music streaming model stuck, but was made legal by centralized players (Apple, Spotify, Pandora) who could charge users to access the music they host on their servers (and also pay royalties to record labels). The peer-to-peer technology is now similarly displacing the need for centralized servers for businesses beyond music including identification, cross-boarder payments, gaming, and cross-boarder real estate ownership.

State of Blockchain and Cryptocurrency Today

As shortcomings of the Bitcoin blockchain challenged vendors trying to transact with it (mainly because of its slow transaction throughput and cost) and decentralized app developers trying to build on top of it, various other blockchains have emerged with additional services and fixes. Newer public blockchains include Ethereum, Stellar, Ripple, ESO, Cardano, VeChen, among others. Private blockchains (where individuals outside the organization can not view transactions) are being used in healthcare, government processing, IOT, supply chain, among others.

Thanks to Bitcoin, other cryptocurrencies were used as a way to crowdfund development of new blockchains/protocols including Ethereum (through Ether), EOS, Stellar (lumens), Ripple (XRP) among others. And futher alternative coins or “altcoins” built on top of these blockchains/protocols have been used to fund other Blockchain projects. The coins built on top of Ethereum are built to their ERC20 standard created by Ethereum, which allows for trade of these coins across wallets, exchanges (for example Coinbase recently announced they will support ERC20 coins). Blockchain startups like Ethereum was on its inception, have issued tokens in order to crowdfund, this is called an Initial coin offering (ICO). This has been a great opportunity for startups to find alternative capital beyond VCs, and for investors across the globe to get into blockchain based companies. Crypto trading has growth to around $300bn, and $6.3 billion was raised through ICOs in 1Q 2018, surpassing the $5.6 billion raised in all of 2017. As regulators in the US, Europe and Asia have stepped in the focus has moved to a Security Token which is regulated and required to prove its source of value.

BitCasas is a new company, making our initial coin offering (ICO) to fuel our marketplace of real estate-backed residential loan investments. BitCasas uses an algorithm to identify home loans that yield income and capital appreciation into diverse portfolios in different geographic areas. Our portfolio A provides steady income (low-risk/moderate-return), while portfolio B aims for over 12% return by investing in mortgages purchased at a discount (high-risk/high-return), passing on the discount as capital appreciation. See our blog for more details of our investment approach.

By dividing ownership of a diversified portfolio of real estate loans into tokens, the owners of the tokens lower investment risk and gain liquidity to buy and sell when they want not when the real estate is sold or refinanced.

Owners of BitCasas’s tokens can enhance their own financial portfolio by purchasing tokens early on.

BlockChain in Financial Services was originally published in BitCasas Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

As an investor in real estate home loans, you stand to gain interest income like banks have done for decades. By replacing them as the lender you put your money to work for You, not the bank.

Here is how investing in mortgages works: when a home buyer gets a mortgage, the bank provides the full loan amount at an agree upon interest rate, as a lender you receive this interest income from the homeowner (less a ~1% servicing fee) every month until the mortgage is refinanced (historically the majority of borrowers refinance every 4 years) or until it’s paid in full (mortgage terms range from 3–5year arms and 15–30year fixed loans). When the homeowner makes timely payments the mortgage is called a performing mortgage. A performing mortgage becomes a non-performing mortgage when the borrower misses 6 consecutive payments. This occurs during difficult situations when the homeowner may have unexpected costs or job loss, but a majority of borrowers rebound and continue payments. Unwilling to “workout” non-performing mortgages (loan workout is the process by which a vast majority of non-performing loans become re-performing again), banks are often willing to sell them at a deep discount, this creates an opportunity to gain that discount as capital return in addition to interest income on re-performing loans, yielding 10–40% returns in 1–4 years.

Upside of Re-performing Mortgage Investments

Investing effectively in non-performing mortgages requires analyzing conditions that inform the likelihood of the mortgage becoming a re-performing mortgage — when the borrower continues to pay. Criteria include real estate demand, housing pricing, asset conditions, loan to value ratio (LTV) as well as borrower financial and employment criteria. Mortgages backed by the primary home of a borrower are the least risky because their home is a necessity — unlike a loan backed by a car or second/vacation home a borrower is more likely to default on first.

You may be asking: Can’t banks make this analysis themselves and keep mortgages most likely to repay? The answer is no, banks are not in the business of investing in re-performing mortgages. Bank employees are paid for originating new mortgages, collecting an origination fee upfront, and collecting interest. Banks are so conservative, many are happy collecting an origination fee then selling even performing mortgages to a secondary mortgage market investor (FannieMae, Freddy Mac, hedge funds, or securitized MBS’s, the latter is a pool of mortgages offered on stock exchanges for a premium) who pays the full principal amount and a small discount/premium (typically ~1% depending on the value of future revenues, ie net present value). This creates one investment opportunity, but one that requires more capital to compete with institutional investors, with stable but returns around the interest rate (currently 4–5% for conservative mortgages).

Say the bank kept the mortgage, but it then stops performing because the borrower was laid off. The bank will then act according to their policy reflecting the return expectations of their conservative investors — put in place by a finance executive who will never see individual mortgage files nor meet the struggling borrower. Because a bank can have millions or billions of dollars in mortgages they will rarely conduct a workout, instead will leave it up to a 3rd party servicer to collect payments without digging into the borrower’s circumstances, and in as little as 6 months may sell the mortgage at a discount. This creates an investment opportunity.

Re-performing Mortgage Investment Example

Let’s use an example to illustrate the investment opportunity a non-performing loan presents. Say the following mortgage was issued to John:

Borrower: John Wells
Date issued: January 2015
Original Home Value: $600,000
Mortgage Original amount: $480,000 [originated January 2015]
LTV (Loan-to-Value): 80%
Mortgage Interest Rate: 4.5%
Principle and Interest Payments: $2,000 per month
Location: Houston, Tx
Mortgage type: Fixed-rate, Primary Home

John purchased the home in January 2015 for $600,000, putting down 20% cash and borrowing $480,000, which means his LTV (Loan-to-Value) ratio was 80% ($480,000/$600,000=80%) — a typical LTV for home purchases.

John has unfortunately lost his job and has stopped paying his loan for 6 months, the bank is ready to sell it at a loss in order to get capital to make new loans while not expecting those 6 months to be repaid. In order to decide if this is a good investment, we calculate the current market price for the home and likelihood of John continuing payments.

Based on local housing market data we are confident his home value has modestly increased to $620,000. He has also paid down his principal outstanding balance to $400,000, yielding an LTV of 65% ($400,000/$620,000=65%), much more attractive than the original LTV and far below what is considered a risky LTV for the Houston market according to our data.

There are a lot of criteria that go into accessing the likelihood of John repaying his loan, let’s discuss a few. In this instance say we learned his profession is a high-in-demand electrical installation project manager who has reserves in his bank account. We also know that his mortgage payment makes up 15% of his expected salary for target jobs in the Houston area. Lastly from a credit report, we can see his overall debts are low, with total debts including his mortgage payment (P&I) totaling only 20% of his income, also known as his DTI (Debt-to-Income) ratio.

We decide there is a high probability of the loan becoming re-performing or being able to re-sell the home within 6months (workout with John the first step, foreclosure last resort). To be conservative we may estimate John will be able to resume payments in 12 months, not 6, so we calculate an additional loss of 12 months worth of payments $2,000 x 12 = $24,000. In reality we would calculate a probability ratio and apply that to the discount (BitCasas achieves this through an underwriting algorithm validated by the community), as well as the time it takes to start getting returns, but let’s keep it simple and say we want a $50,000 discount for possible losses and our time and effort. We offer the bank only $350,000 for the mortgage that could eventually pay off $400,000. The bank accepts. Our deal looks like this:

Home Value at Acquisition: $620,000
Mortgage Outstanding principle: $400,000
LTV (Loan-to-Value): 65%
John’s DTI (Debt-to-Income): 20%
Our Investment: $350,000

John finds a job and begins to repay his mortgage 6 months later; we have now made $38,000 in capital gains plus income of $2,000 per month providing a total cash-on-cash return of 11.43% in month 6 passed on to you as the investor ($40,000/$350,000=11.43%).

If John refinanced his loan within 24months of our purchase we would receive $391,000 ($400,000-$9,000 principal payments=$391,000), more than we paid for the loan for a return IRR of 39.10% for investing our capital for 24 months.

Diversification

Like any other investment, diversification is key to gaining additional protection by lowering risk. In stock investments, diversification means spreading your money across various companies and industries such as tech, healthcare, consumer goods, etc., so that if one industry is down or a company goes bankrupt you don’t lose all your money/returns. When investing in mortgages we can achieve diversification investing in a portfolio of both performing and re-performing mortgages as well as different geographies, employment hubs, and credit ratios (LTV, DTI among others).

BitCasas built an algorithm housing years of investment acumen (during up and down markets) used to rate mortgages based on their risk and return profile. Data and feedback from industry veterans (our blockchain community governance) are key components incorporated into our underwriting allowing our investors to enter the best non-performing mortgage deals faster versus secondary mortgage market players (FannieMae, hedge funds, Mortgage Backed Securities). Every day we are building on top of our relationships to gain access to larger pools of mortgages across the US.

How Can You Become A Mortgage Investor?

Capital and relationships are key to become a mortgage investor because unfortunately, it’s not easy to obtain access to investment opportunities like that highlighted above. By joining BitCasas, you pool your investment alongside other investors to gain access to a portfolio of performing and non-performing mortgages yielding steady income and capital appreciation.

Become an investor and support the American dreams for families by making mortgages part of your investment portfolio, join Bitcasas.io.

How to Invest in Real Estate Debt and Earn Income + Growth was originally published in BitCasas Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

When George Bailey, our main character in It’s a Wonderful Life, played by James Stewart, responds to a run on the bank and says that the banks’ money is not in the bank, it’s in the houses of all the people in the town who otherwise would not be able to own their own home, it’s an iconic scene which serves to remind us of the power of combining the savings of individuals and lending them to others. Today we see the role a centralized bank plays in lending as increasingly disconnected from the community with new models of self-sufficient crowdfunding emerging with improved value for both borrower and lenders — lending by the community to the community.

Recent questionable bank behavior has given us insight into the minds of those running our financial institutions. Their priority seems to be returns at any cost, and not doing the right thing of balancing returns with delivering equitable services to customers and community. Many of us know someone who lost their home in these last years while trying to workout a deal with their lender, and very few changes have occurred since the 2009 Great Recession.

Enter Blockchain, a disruptive alternative to our traditional institutions that will allow alternative lenders to fuel mortgages that make home ownership possible for millions of Americans. What blockchain makes possible that centralized technology did not allow previously is the tokenization of real-world assets within a decentralized platform — said differently not one institution needs to be trusted, instead trust is placed on community oversight (this is the “trustless” feature of blockchain).

BitCasas utilizes Blockchain’s ledger system to split up the ownership of home mortgages into tokens, creating easily digested bits that allow the middle class, ordinary citizens to own a piece of the real estate action — owning a bit of casas (houses). Also, in the process improve on bank/institutional investor policies of restructuring mortgages with the community in mind.

BitCasas’s proprietary underwriting algorithm and Blockchain’s community underwriters are the keepers of the system, supplying a variety of mortgages to invest while taking into consideration factors banks do not focus on. Lenders (individual investors in the tokens) earn money both through dividends, paid as interest on the mortgages, and also by holding and later selling the tokens, as the value of the tokens goes up as the company grows. One can think of owning tokens as being similar to owning stock. Owning one share of Apple’s stock is a way of having a small piece of company ownership. One share is not considered a major stockholder, but none-the-less, a part-owner of the company.

George Bailey may have never imagined the internet or blockchain, but he understood the power of the community and that the trust they have in each other is much stronger than a centralized bank could offer. Join our mortgage investing community at BitCasas.io.

Written by Sandra Winkler, Marketing Content Writer for BitCasas, and Editor of IEEE SF Bay Area Council’s eGrid.

BitCasas, the New Way to Invest in Real Estate was originally published in BitCasas Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.