Hard Money
A term used to describe a specific type of currency. More specifically, it is a term used to describe metallic currency, usually in the form of gold or silver.
What Is Hard Money?
Hard money is a term used to describe a specific type of currency. More specifically, it is a term used to describe metallic currency, usually in the form of gold or silver. This form of currency is thought to have intrinsic value apart from the value associated with or given to it.
Coins, for example, are known to have value; they are a form of cash with which we can buy and purchase things. This differs from cash, however. Coins, as we know, are a form of money, but aside from that, the metal is also worth something.
Cash in the paper is just paper when stripped of the value we have given to it. The actual paper does not hold much value. Cash in this form is known as soft money and is today's more commonly used form of currency.
In essence, this money refers to the matter and physical properties of the asset at hand. Currency from any kind of metal is generally what is implied. The use of gold and silver as currency was more popular years ago; however, there are new forms of hard currency today.
Increasing in popularity today is hard money in the form of bitcoin or cryptocurrency. These are forms of digital currency that are separate entities from the central bank. They are known to have high intrinsic value.
The idea behind this type of money is that it is thought to have more market value stability and will always hold a value of some sort, whereas soft money is known to be more volatile. It is also known to have a high exchange rate concerning foreign currencies.
This money's value differs very little compared to that of soft money. A country's currency constantly changes in value when looking at exchange and comparison rates.
Understanding Hard Money
Some may be wondering where this term originates and why there was a need to differentiate different forms of money. The term hard money originated in the United States after the Second World War during the Great Depression.
The banking industry collapsed as a result of the depression. This created panic and fret among a large portion of the population which caused many individuals to take out their money from their bank accounts.
In keeping their money at home, they were reducing the amount of money in circulation. Consequently, people were having great difficulty accumulating extra cash when needed, so they began to use properties as collateral.
Even though these forms of loans have very high interest rates, the people had no other options, so they would proceed with them regardless.
After World War 2, hard money lending did have some impact. Private short-term debt became an important component of future real estate development.
It is unfortunate, however, because these money loans have been granted a bad reputation and have been given a rep for being exploitatory. This is largely in part to the being vastly misunderstood.
They are extremely beneficial and useful in times of global financial crisis. These types of loans can potentially serve a very functional purpose for investors and borrowers of real estate.
Its popularity has increased immensely in the 21st century. In the 2010s decade, research suggests that private lending has more than doubled in that time. In the United States, the private debt is now more than 700 billion dollars.
The rise after the recession was largely due to frustrated lenders trying to work around the Dodd-Frank Act. The Dodd-Frank Act was an act implemented to promote financial stability in the United States.
What Is a Hard Money Loan?
You will most commonly hear this term when dealing with hard money loans. This form of loan deals with secured property, most commonly used in real estate practices when dealing with real property.
These forms of loans are thought of as a last resort, and instead of banks being the lenders of these loans, it is typically companies or individuals who issue the loans.
The time frame for funding these loans is usually shorter in length. The nature of these loans relies on collateral, typically in the form of property, as opposed to the financial position of the individuals being issued.
This type of loan is risky and is only granted if the lender sees high potential in making it. These forms of loans are commonly sought out by individuals who buy properties and then flip and resell, usually within the one-year time frame.
An advantage to this form of loan is that it generally has a shorter approval process. This is primarily because the nature of the loan is not based on the borrower's financial status and does not need the bank's approval.
If the lender never receives repayment, they may get a greater reward from reselling the property or obtaining possession of it, that is, if the borrower defaults.
However, these forms of loans are known to have lower loan-to-value ratios. If the loaner is a good house flipper, the LTV rate can run a little higher. This concerns the idea that property is the only protection form.
They are also known to have extremely high interest rates. The rates typically range from about 7.5 to 15%, but more commonly, they like to stay around the 11% range. The high interest rates are used to help mitigate the risk since this is a risky transaction.
hard money loan borrower examples
It is not uncommon for borrowers who get denied bank loans for mortgage-related purposes to seek a hard money loan. This may even be their first choice as it avoids the lengthy process of having to be approved by the bank for the loan.
The most commonly known example that was even previously mentioned and talked about is property flippers, and these loans are used to fund new potential projects. There are other reasons why a hard money loan might be given out.
Additional instances in which a hard money loan might be given out are for wholesale funding, renovating, and rent purposes. Another name for these types of loans is short-term bridge loans or “loans of last resort.”
Loans of last resort are the type of loan you turn to when you desperately need some funding. Typically it is your last resort hence the name. You turn to it when you have exhausted all other loan options.
In wholesale funding, these loans are beneficial due to their ability to be obtained quickly. Wholesale funding enables you to keep your financial status private from the buyer and seller and can be used in place of contract assignments.
When looking at renovating and rent purposes, their purpose is similar to that of the property flippers. They are similar in that the primary purpose of the loan is to fund property projects, but here, the purpose of the property after is to be rented.
Additionally, someone might turn to this form of lending when purchasing commercial property. This is usually the case if the property or piece of real estate at hand is special or unique. Sometimes properties don't qualify for typical financing, so a different route must be taken.
Bitcoin
Bitcoin is a form of digital currency created by a group of individuals known as Satoshi Nakamoto to transfer money over the internet. This form of money transfer is without the central bank's control and is generally used as any other currency would be.
Nakamoto is believed to be the world’s first cryptocurrency creator and the largest too. He was the original miner of the first blockchain and published the paper to make the currency official.
You may be wondering why this is a form of hard money; well, there is a cap on the amount of bitcoin to be created. Once there are 21 million bitcoins created, no more can be made. This is what constitutes bitcoin as hard money.
Once the limit of 21 million bitcoins is reached, no more will ever be created. The last Bitcoin is expected to be mined in 2140. This is why Bitcoin is the purest form of hard money. The best part about it is that it exists solely in the digital world.
It is just as concrete as gold. It shares many of the same properties being that it is immutable. The only concern associated with Bitcoin is the possibility of getting hacked. This is not expected to happen for years and years and likely not even within our lifetime.
Many wealthy entrepreneurs invest and see the value in Bitcoin. The top 5 leading investors are listed below.
- Barry Silbert (Digital Currency Group founder)
- Michael Saylor (CEO of Microstrategy)
- Tyler and Cameron Winklevoss
- Elon Musk (Owner of Tesla)
- Michael Novogratz (Galaxy Digital Holdings founder)
A beginner can go about purchasing Bitcoin through several different exchanges. Some of these include Kraken, Coinbase, Gemini, and more. By selling bitcoin on a cryptocurrency exchange, you can convert it to cash.
Some people are using Bitcoin as an alternative to the current financial system set in place. Many reasons for this are the bank’s interest rates, hours of operation, etc. Bitcoin could be a way to fix finance.
Many are experiencing financial burnout caused by financial and monetary stressors. Some monetary stressors are inflation, currency manipulation, retirement plans, and a lack of trust in political organizations.
Bitcoin is a way to protect yourself from these stressors. People who use Bitcoin have a different mindset than those who don't. While prices in the typical monetary system fluctuate, Bitcoin users only accumulate more.
It is said to fix finance because the protocol it follows is not governed by finance. No one governs it, or politics are involved; Bitcoin is simply Bitcoin. It is growing in popularity for this reason.
Cryptocurrency
As we know, cryptocurrency is any form of currency existing solely online in the digital world. It uses cryptography to secure all transactions. It is also a peer-to-peer system because anybody anywhere can send and receive currency from one another.
The transfer of funds is recorded and stored online in a public ledger. The funds are stored for individuals in a digital wallet. Advanced coding ensures that all transfers are legit and everything works properly.
All cryptocurrencies are run on a distributed public ledger known as a blockchain. Blockchain keeps a record of all transactions.
The currency gets obtained through mining, which uses software involving advanced mathematical problems that help generate coins.
The production and evolution of cryptocurrency continue. It is expected to become more popular and may even be used in stocks, bonds, and other financial assets.
Apart from Bitcoin, there are several other forms of cryptocurrency growing in popularity;
- Ethereum
- Litecoin
- Ripple
Ethereum is probably the second most popular cryptocurrency after Bitcoin. The currency used is called Ether and was developed in 2015.
Litecoin is also very popular and probably the closest to Bitcoin in terms of similarity. Litecoin seems to be developing quicker, however, and is trying to surpass Bitcoin in terms of efficiency.
Ripple, on the other hand, is a ledger system that tracks all transactions, not just cryptocurrency ones. It was founded in 2012. A cryptocurrency that is not Bitcoin is known as altcoin to distinguish the original from the others.
A common question regarding cryptocurrency is how you even purchase cryptocurrency. There are three main steps one should follow.
- Step 1: Choose a platform (Traditional broker or cryptocurrency exchanges)
- Step 2: Fund your account. Once your account is funded, you may begin trading.
- Step 3: Place an order for the cryptocurrency you want to purchase.
There are some additional steps one could take. However, these are the main ones to follow.
Researched and Authored by Patricia Brruto
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