For many individuals seeking out luxury real estate, Bitcoin and other forms of cryptocurrency remain elusive. Unless you have direct, hands-on knowledge or experience with it, chances are your only familiarity is from headlines of people forgetting passwords and losing access to millions of dollars worth of Bitcoin.
Part of the reason Bitcoin remains a murky subject is the fact that it's still an emerging form of payment. It is a payment system that continues to gain widespread acceptance — celebrity power couple Tom Brady and Gisele Bundchen are spokespersons for FTX crypto — even as plenty of doubt exists on its ultimate acceptance into the mainstream. That means there is potential for Bitcoin (and peer cryptocurrencies) to become a standard form of payment for luxury (or any) real estate transactions.
Below we explore some of the basic ins and outs of the crypto craze and attempt to answer how Bitcoin (among others) may affect the housing market.
What is Bitcoin?
Bitcoin is a digital cryptocurrency. The distinction is important as all cryptocurrencies are digital currencies. However, the same can not be said for all digital currencies being crypto.
Cryptocurrencies are a sub-form of digital currency and get their name from the complex encryption standards used to verify transactions. "Cryptos," as they're commonly referred to, most often take the form of coins or tokens that hold and transfer value.
The terms Bitcoin and cryptocurrency are often used interchangeably since its technically correct. Bitcoin, though, is just one type of cryptocurrency. In fact, there are well over 1,200 different forms of cryptocurrencies. The five largest cryptocurrencies by market cap include:
- Binance Coin
A few other notable cryptocurrencies are Cardano, Dogecoin, and USD Coin. These payment forms can be utilized for real estate deals, assuming both buyer and seller agree to and are capable of making the digital transaction.
The best way to view Bitcoin is as virtual money. It doesn't exist physically, but it's very real. You can earn it, spend it, or save it, similar to the money you might keep in a PayPal account. The transaction simply happens in a virtual environment.
Bitcoin is the original cryptocurrency, established in 2009. It has been in use the longest and has the greatest adoption rate.
How Bitcoin works
Bitcoin can seem like a foreign language to the uninitiated. Thankfully, its underlying principles are straightforward.
New users establish a Bitcoin wallet (on their computer or smartphone) upon which generates a Bitcoin address. More addresses can be established, but you share those addresses with others to use as a form of payment. If it sounds like email, it is because it's relatively similar, except Bitcoin addresses a single-use proposition.
When a transaction occurs, it's verified via the blockchain, a shared public ledger, and the foundation for the Bitcoin network (more on that later). Confirmed transactions are added to the blockchain, allowing Bitcoin wallets to discern balances and certify ownership.
When values are transferred between Bitcoin wallets — the actual transaction — the wallet retains a secret piece of data or private key. This "key" is proof of your ownership over the wallet and secures the transaction against further alteration.
Again, that's a general overview. As with many emerging technologies or evolving digital environments, there's more information to absorb. If you’re looking to understand Bitcoin and its impact on real estate, the basics are an excellent place to start.
The potential future for real estate transactions
A lot of words have been used to describe Bitcoin and its counterparts. Many of them are complimentary, but many more are not. The most common, however, is the term disruptor.
As Bitcoin and its underlying blockchain technology have gained traction, they've opened up new methods of conducting and transacting business across many different industries. Real estate is no different.
Though at times slow to adapt to new technologies, the housing industry is starting to catch on, with the luxury market, in particular, embracing digital deals. Much of that is attributable to how Bitcoin eliminates more traditional aspects of buying and selling real estate, but how blockchain secures those Bitcoin transactions and its potential for further application is crucial.
Buying and selling with Bitcoin
Most real estate transactions involving Bitcoin are not genuine "Bitcoin wallet to Bitcoin wallet" transactions. Instead, buyers wanting to use Bitcoin to purchase a property convert their Bitcoin into U.S. dollars (USD) through a service called BitPay. Then, the USD is transferred to the seller. The process still requires a title company, attorneys, banks, and all the typical conventions of a classic real estate transaction.
An actual Bitcoin to Bitcoin sale eliminates all of that. As the transaction occurs via the Bitcoin blockchain network, no third parties are involved in the deal. No banks, no title companies, and in some cases, such as deals between a developer accepting Bitcoin and a buyer using it, no real estate agents.
This is where the real disruption to real estate's status quo enters the picture. The two central advantages to this are the speed at which the transaction can move and the implications for overseas buyers.
First, you dramatically reduce the time needed to close the deal without needing a bank, attorney's office, or title company to verify the validity of the property purchase. It will further reduce the costs involved with those services, making it both a time and money saver.
Should Bitcoin to Bitcoin transactions become commonplace, you can expect a reshaping of the industry and who needs to be involved in the process.
For the foreign investor, bypassing financial institutions and state banking policies quickens the pace at which a deal will close. It makes U.S. real estate even more attractive than it already is. While the allure is apparent for markets where overseas investment is already prevalent — think New York, Los Angeles, or Miami — it could have implications for places like St. Louis.
In U.S. markets less familiar with foreign investment, a vast reduction in the purchase window can allow the Bitcoin buyer to quickly take advantage of favorable buying conditions. For some markets, it could be much faster than those buying with traditional forms of financing. The potential to reshape a market could be huge.
The benefits of blockchain
Though Bitcoin often earns all the headlines, the blockchain part of the cryptocurrency equation could ultimately prove the true industry disruptor.
Blockchain is essentially a secure, public ledger or database of collected transactions. Those records — or "blocks" — are added to the ledger chronologically upon the completion of each transaction. Each new block's authenticity is verified by the network as a whole instead of a central authority. With the ledger stored on every computer (referred to as nodes) within that particular blockchain network, you create a specific trust and transparency that is essentially impossible to falsify.
The implications of decentralized transaction verification are far-reaching. For the real estate industry, no longer would financial institutions be the final authority in legitimizing transactions. Nor would they be the gatekeepers for the records and data of those transactions.
Smart contracts are one of the primary ways decentralization would manifest itself in real estate via the blockchain. Essentially digital agreements between two parties, these contracts would contain a mutually agreed-upon set of paraments that, once stored on the blockchain, become immutable — verified and available for public review on the blockchain. There would be no questioning the contract terms, which would be more easily enforced after execution.
Again, by eliminating the need for a third party to steer or affirm the agreement, smart contracts promise a swifter and more straightforward real estate process. Consider applying this to escrow and inspections or titles and sales contracts. On the rental side, lease agreements or other property management contracts would find a home on the blockchain.
Accurate property history
Finally, beyond Bitcoin offering an alternative path to property acquisitions or its blockchain technology streamlining an increasingly dated real estate transaction process, there's potential to revolutionize property record management.
One example primed for change is the industry's long-standing multiple listing service (MLS). Although a valuable and information-rich database for agents and their home buying and selling clients, real estate's regional and often hyper-local nature results in a disjointed and often inaccurate MLS.
With blockchain as the foundation for a new system of data tracking, a given market's property records are more dynamic. A property is tagged with an electronic stamp or ID. When an event occurs with that specific property — improvements, listing, inspection, repairs, or purchase — the property record is updated in real-time.
Instead of an unverified, basic set of data points, there's an established record of a home's improvement, sales, and purchase history. As the information would be accurate and verifiable, this provides a more meaningful record of a market's inventory and reduces the potential for fraud or misleading information about a property.
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