Cryptocurrencies have come a long way since Bitcoin was released as a peer-to-peer electronic cash system in 2008.
However, as it relates to real estate it wasn’t until December 2017 when the first peer-to-peer Bitcoin only real estate deal happened with a condo in Miami, or less than a year ago!
Every week I see more about Bitcoin and Blockchain, and many people are curious if they can use their Bitcoin or other cryptocurrency in a real estate transaction. The short answer is YES…but…
I’d first like to give a brief overview of what Cryptocurrency and Blockchain are before diving into how it relates to real estate specifically.
Blockchain is the underlying technology for cryptocurrencies and basically acts as a ledger for transactions. It’s a distributed, or decentralized network of servers in multiple locations. With no central hub it is much safer than the traditional banking system while making it easy to verify funds or transactions (although they are encrypted for privacy). Blockchain uses open source technology meaning that anyone has access to the code allowing bugs to be fixed quicker and huge room for innovation.
Bitcoin is the world’s largest cryptocurrency, and in fact the world’s 5th largest currency overall. It’s open source and uses peer-to-peer technology and as said above has no central hub and nobody owns or controls it. Transactions are done in the network and recorded on the Blockchain. The only way to create Bitcoin is by what is known as mining. However Bitcoin can be bought and sold through exchanges like other investments such as stocks and bonds. Bitcoin owners store their Bitcoin in wallets, which they also use to send and receive the currency. The wallets encrypt the private keys and are very secure – if a wallet owner loses his or her login info it can be hard to regain access.
This was a very brief overview of Bitcoin and Blockchain in general and I‘d be happy to point you to more information.
Now let‘s talk about how Bitcoin can be used in real estate in Colorado.
As I said above, Bitcoin can be used in a real estate transaction, however the buyer must supply to the title company what is referred to as ‘Good Funds‘ which is either a cashier‘s check or wired funds in USD. Therefore, cryptocurrency is not ‘Good Funds‘, but that doesn‘t mean it can‘t be used.
The way to treat it is as an asset, and thus an asset transfer. Some lenders are allowing Bitcoin to be used for a downpayment, and it is allowed by Fannie May and Freddie Mac. The requirements are that there must be proof that the funds belong to the buyer, which is easy, and the asset (Bitcoin) must be exchanged for US dollars before going to the bank.
Should a buyer want to use Bitcoin for a large amount (the majority of a pricey transaction) they should be careful that the exchanges might force a discount for such a large amount, and shopping around for other investors is beneficial.
Since the title companies and real estate brokerages don‘t accept cryptocurrencies directly, only about 92% of the purchase price can be financed with Bitcoin as the other 8% or so will be commission and fees.
On the surface it looks pretty easy to do a transaction in Bitcoin if the Seller is willing to accept is as payment. However, Bitcoin‘s value is extremely volatile and even though it will help speed up transactions, the value can change a lot before closing.
What I see as the best way to protect the transaction is to have an agreed upon butterfly spread to hedge against the volatility using Bitcoin futures. Doing this where there‘s a loan involved is probably very difficult at this time, if not impossible, but if it‘s the equivalent of a cash transaction in Bitcoin it could be something to explore. Goldman Sachs has already said they‘ll be trading in Bitcoin futures and it will be interesting to see how investment banks and financial institutions will treat it in the future.
If a buyer has Bitcoin to cover the transaction but the Seller wants payment in US dollars, it‘s pretty simple. The buyer writes a cash offer and exchanges the Bitcoin for USD. In this scenario the voltility risk is completely on the buyer and up to them if they‘d like to take any action as suggested above to minimize it or if they‘re willing to bet on the fluctuations being in there favor at closing time.
In a reverse scenario where a Buyer has cash but the Seller wants Bitcoin there are a few possible ways of doing it. The simplest of course is to have the Seller exchange the USD to Bitcoin after the transaction, but most likely they‘ll be expecting a certain value, without volatility risk, and thus the Bitcoin value must be pegged to something at the beginning of the transaction.
Clearly this is a new topic in the world of real estate but there are many potential benefits to using Bitcoin such as security because of the decentralized network and transparancy of transactions, lower fees, and speed since the parties involved don‘t have to rely on the hours of the banking system and the slow wire transfer system. One thing where I really expect to see more Bitcoin real estate transactions is with foreign buyers in the luxury market, thus increasing the buyer pool.
What the future holds will largely be dependent on politics and regulation which the industry will keep a close eye on.
Meisner, A., 2018, Bitcoin, Blockchains, Cryptocurrency & The Future of Real Estate, CE Class, 09.26.18
Zaleski, A. (2018, March 21). Buying property with bitcoin. Retrieved September 26, 2018, from https://www.curbed.com/2018/3/21/17143564/bitcoin-buy-property-real-estate-cryptocurrency-blockchain
Zhao, W. (2018, May 03). Goldman Sachs to Begin Bitcoin Futures Trading. Retrieved September 26, 2018, from https://www.coindesk.com/goldman-sachs-to-begin-bitcoin-futures-trading-within-weeks/