For an industry built on traditional transactions – from standard 15- and 30-year fixed-rate mortgages to offers of straight cash – the prospect of purchases made with cryptocurrency can prove otherworldly to the uninitiated. Even a bit intimidating, perhaps.
But, much like other forms of payment, digital currencies carry real value. That real value is making considerable inroads in the acquisition of real property. And, it's growing in popularity.
If you're currently in the market for a vacant lot or luxury home or any other piece of real estate, and the thought of buying it with digital currency intrigues you, read on. Below, we explore the ins and outs, benefits, and risks of making real estate purchases with cryptocurrency.
Blockchain vs. Cryptocurrency
Before delving too deep into the world of cryptocurrency, a little background.
At its most basic level, cryptocurrencies such as Bitcoin are nothing more than software functioning as a method of virtual payment. It's a standalone form of currency, much like fiat currency such as the U.S. dollar, the British pound, or Euros, only in digital form, with no physical presence. You can use dollars to acquire bitcoin and sell bitcoin to reacquire dollars. Cryptocurrency is viable in any transactions that accept it – increasingly, this includes real estate.
Unlike more commonly accepted forms of currency, which are backed by banks or governments, Bitcoin and its crypto counterparts (Ethereum, Tether, Binance Coin, Cardano, Dogecoin, among numerous others) is decentralized.
Instead, the validity of a cryptocurrency is measured using a public ledger system called a blockchain. Bitcoin and other currencies like it are created, distributed, traded, and stored within a blockchain.
Though the terminology is often used interchangeably, there's a vital distinction between cryptocurrency and blockchain.
Cryptocurrency is just that – currency. A peer-to-peer digital payment system.
Blockchain is an open ledger distributed across a secure, decentralized network that is transparent and verifiable via consensus. An encrypted, verifiable peer-to-peer database.
Although cryptocurrency requires blockchain technology to function, blockchain technology carries functionality beyond cryptocurrency. Additional blockchain applications include supply chains, healthcare, insurance, international transactions, smart contracts, and real estate.
There are roughly 6,000 cryptocurrencies currently in existence. Of course, very few carry any level of significance beyond the small circles of individuals that create and use them. The top 20 cryptocurrencies represent 90% of the market.
Below we look at two cryptocurrencies changing how real estate is transacted.
The world's first and currently largest cryptocurrency is Bitcoin. Introduced in 2009, it has set the standard for which all other cryptocurrencies have followed.
As noted earlier, bitcoin is created, distributed, traded, and stored using the decentralized blockchain ledger system. Though it's had a turbulent history with wild swings in its value and popularity, its found general acceptance, as evidenced by the legion of other cryptocurrencies it's inspired.
In terms of direct, bitcoin to bitcoin real estate transactions, they are rare. That said, you can purchase real estate with bitcoin. A buyer utilizes a service such as Bitpay to convert their bitcoin into U.S. dollars and then pay the seller, effectively buying the home via cash transaction.
Building off the promise of unique and dynamic transactions through blockchain technology, services such as ATLANT promote real estate transactions by tokenizing real property.
In other words, real estate transactions are akin to stocks. This opens up the possibility of fractional ownership or investment. You purchase a percentage of tokens which represent a full or partial stake in a given property.
The internationally based platform works like this:
- An owner provides ATLANT details of the listing, which is then verified to be in good condition and free of debt
- ATLANT tokenizes the property for the owner, the number of tokens correlate with the property's value
- The tokens are placed in a Property Token Offering (PTO) trading platform, where investors buy them (acquiring fractional ownership) until funding is complete
- The seller receives payment in their preferred form of cryptocurrency
- The investors receive the share of tokens they purchased
- Tokens are bought and sold through ATLANT's decentralized exchange
In residential real estate terms, this translates into investors accessing properties that might have been too expensive or facilitating easier fractional ownership opportunities. Investors owning tokens can earn proportional income from rentals or see the value of tokens increase (or decrease) as the property's value fluctuates.
How to use
As we outlined above, use cases for Bitcoin and its related cryptocurrencies and blockchain are relatively straightforward. The two basic tenets of what makes these transactions different from more mainstream forms of buying and selling are their anonymity and decentralization.
To complete a real estate transaction with bitcoin requires the following:
- Both buyer and seller to be agreeable to this type of transaction
- Title insurance and escrow companies that are comfortable facilitating transactions through non-traditional means
- Conversion of bitcoin into fiat currency (the aforementioned Bitpay) as most sellers will not be agreeable to accepting actual bitcoin as payment
Ultimately, that's the extent of what is necessary to complete your home purchase with cryptocurrency. Once you grasp the fundamentals, it's all reasonably straightforward.
Of course, as with everything else revolving around real estate, there are pros and cons to transactions with cryptocurrency (or another blockchain-based platform).
Although transactions made on the blockchain are transparent and easy to track, they come with a certain level of privacy but are not wholly anonymous. As the buyer (or seller), instead of tracking or identification by name or contact information, you use addresses and pseudonyms – private keys and passwords – to identify the transacting party.
Easier to use internationally
Should you plan on making real estate purchases internationally, cryptocurrency offers an easier method for payment than traditional means. With no intermediary necessary (bank or government) to facilitate the transaction, fees are considerably lower and don't involve exchange costs.
If you narrow it down to its simplest terms, buying with bitcoin is similar to a cash purchase. And just like cash, you'll save a considerable amount of time bypassing the more traditional lending process. In most cases, once everyone agrees to terms, the transaction itself takes no more than 15 to 20 minutes to process.
In addition to narrowing the timeframe for a transaction, cryptocurrency can increase a buyer's negotiation power. For starters, sellers regularly favor cash offers over those that are financed. That can place your Bitcoin offer ahead of those backed by a lender. As Bitcoin's value fluctuates, sellers interested in cryptocurrency may be willing to cut a deal at a lower price, betting on Bitcoin's value to rise.
Cryptocurrency offers a decentralized network on which to process transactions. This means fewer brokers or facilitators involved with the deal. You don't have to pay the standard fees and commissions associated with more traditional lending-based real estate purchases.
Though it continues to gain popularity and acceptance, plenty of risks are associated with dealing in cryptocurrency, with the four most prevalent below.
Costs of opportunity
Make no mistake, cryptocurrency is a volatile asset to own. It may carry incredible value today, but all be wiped out tomorrow, reducing your buying power. In addition, once you commit to making a purchase with any form of cryptocurrency, you reduce yourself to an extremely narrow field of opportunity.
An underlying tenet to blockchain technology is that it's irreversible. It's purposely designed this way since it lacks intermediaries – such as banks – that are common in today's financial transitions. Once a transaction is finalized, there's no going back. As a peer-to-peer transaction, the only way it can be refunded is through the individual who received the funds. Before moving forward on any cryptocurrency purchase, have redundancies in place to avoid transaction errors.
Not everyone uses it
Though it may seem that news and financial networks run a story about cryptocurrency almost daily, it's not that widespread. If you're looking for a willing seller to deal in crypto, you might be looking for a while. Not only can it increase the time it takes to find and close on a home, but it severely limits the pool of homes available to you. Some sellers may make it known they are favorable to cryptocurrency within their listings, but it remains rare.
Potential tax complications
Finally, as you might have already guessed, you don't escape taxes by using Bitcoin or any other cryptocurrency. The IRS views cryptocurrencies similar to stocks as an asset to buy and sell in the hopes of making money. As such, you're subject to capital gains taxes based on your tax bracket and your specific transactions throughout the year.
Ready to explore the best of San Francisco real estate? Contact the Gregg Lynn Team today to start your real estate journey. From Pacific Heights real estate to Noe Valley homes for sale, allow Gregg's years of experience and expertise to be your guide to the Bay Area luxury real estate market.