In another sign of the times, a growing number of property owners are embracing the idea of selling or renting their real estate in exchange for bitcoin instead of regular currency. The growing acceptability of bitcoin, which is the most popular type of cryptocurrency, is creating new risks and opportunities for real estate investors as well as entrepreneurs looking to capitalize on this new digital business model.
As with other innovative disruptors, the exact impact of cryptocurrencies is not yet clear. The full extent of how bitcoin will impact brokerage practices, mortgage lending, property valuations and credit ratings has yet to be determined. The only certainty is that bitcoin is becoming a greater part of the real estate business.
Bitcoin
Bitcoin is the most widely used type of cryptocurrency, which is a digital peer-to-peer currency used in lieu of regular currencies such as the US Dollar or the Euro. There’s a host of other cryptocurrencies such as Ethereum, Ripple and Litecoin, among others. However, bitcoin is the most widely used of this peer-to-peer electronic money system. Bitcoin was invented in 2009 by a person, or group of persons, under the pseudonym of Satoshi Nakamoto. There are no governing entities that regulate or oversee the world’s most popular cryptocurrency. It is strictly peer-to-peer.
There are two ways to obtain Bitcoins:
- Create an online wallet and purchase bitcoin through any number of exchanges. The current price of a single bitcoin is around $3,900, up a staggering 500% over the past 12-months. In 2017 alone, the price of bitcoin is up by almost 280%.
- Earn bitcoin through “mining”. This occurs when a user utilizes their computer and other hardware accessories to validate other bitcoin transactions on a public online ledger known as a Blockchain. Each validated transaction earns the user/processor a fraction of a bitcoin. Mining is the only way new bitcoins are created.
Bitcoin Growth
The reasons for the growing popularity of cryptocurrencies are threefold:
- Circumvent Laws: Owners of bitcoins can circumvent laws that monitor the origin, flow and use of other common currencies. By converting regular money into bitcoins, owners of can use the cryptocurrency to conceal their revenue sources, including proceeds from illicit activities such as drug dealings, bribes and the movement of stolen goods. This has given rise to allegations that bitcoin is primarily used as a medium for money laundering.
- Bypass Money Transfer Requirements: Cryptocurrencies are increasingly being used by legitimate investors, especially from developing countries, who wish to bypass stringent overseas money transfer restrictions. By converting their money into bitcoin, investors can better move their financial assets to more stable countries such as the U.S., U.K. and other developed economies.
- Protect Against Currency Depreciation: Investors in countries with weak local currencies can convert their money to bitcoin as a hedge against further currency depreciation.
Real Estate and Bitcoin
As the use of bitcoin gains acceptability and legitimacy, more owners of real estate are expressing a greater willingness to accept the cryptocurrency as payment for their properties.
For sellers, cryptocurrency opens the door to a wider pool of buyers, especially from rapidly growing economies such as China and India. This bigger audience can help real estate developers move their properties much faster than they could otherwise do by limiting themselves to buyers with regular currencies or traditional financing. More and more websites such as Bitcoin-RealEstate.com, Bitpay.com, Spendabit.co, among others, are advertising properties that can be sold for bitcoin. Even a search on Craigslist reveals more property owners are open to selling for bitcoin. Global developers are also jumping into the fray. The Knox Group of Companies, a British real estate developer, recently announced it would accept bitcoin for an entire 2.4 million square foot mixed-use property that it’s building in Dubai. The $325 million project is believed to be the first major real estate development to accept payment in cryptocurrency.
For buyers, bitcoin is an appealing way to channel their money into physical assets with little or no governmental oversight. Additionally, with the price of bitcoin skyrocketing, buyers are using speculative profits to acquire even more physical assets. Take the example of a buyer who recently purchased a $4 million home in California using bitcoin. At the beginning of the transaction, the price of each bitcoin was $750. However, by the time the deal concluded, the price of bitcoin had jumped to $1,000, explained Sonny Singh, Chief Commercial Office of BitPay, a cryptocurrency processor that helped facilitate the transaction. This enabled the buyer to realize an unexpected saving of more than $1 million, which he then used to buy a luxury car from a dealership, which also accepts payment in bitcoin, added Singh.
Bitcoin Risks
On September 1, 2017 the price of a single bitcoin reached $5,000, up from only $1 on February 1, 2011!!! However, past performance is no guarantee of future results. The price of the most popular cryptocurrency has plunged from the high of $5,000 only 3-weeks ago to around $3,900 as of September 17, 2017. Additionally, so many moving parts are playing a role in bitcoin’s future, from acceptance as legal tender in Japan to a crackdown in China to vagueness and ambiguity in countless other countries. Cryptocurrencies are a high risk high reward proposition.
- Price Fluctuation: As with any type of asset, the price of bitcoin fluctuates. The example of the buyer who pocketed over $1 million in “accidental” profit, could have easily been reversed if the price of bitcoin had moved downwards.
- Vulnerability to Loss or Hacking: Bitcoin can be stolen or hacked. If you lose the hard drive on which your bitcoin is stored, or if the cloud service on which your Bitcoin is stored gets hacked, you’ve likely lost your digital assets forever. There are countless stories of people who lost a fortune because they didn’t retain the machines on which their bitcoin was stored, or maybe even upgraded their computers. Unlike the FDIC, which guarantees bank deposits of up to $250,000, there is no central authority that manages or guarantees bitcoin against loss of any kind.
- Regulatory Consequences: As with other innovative disruptors such as Airbnb and Uber, existing laws do not adequately address the practices of an entirely new business model. As the use of cryptocurrency evolves and grows, new laws and legislations will inevitably be introduced to regulate the market, levy taxes and protect consumers.
Bottom-Line
Bitcoin is rapidly becoming a more mainstream medium of exchange. This will ultimately affect real estate brokerage practices, mortgage lending activities, real estate accounting rules and lease language, all of which will require the industry to quickly adapt to this latest newcomer.