Most people have heard about cryptocurrency but few understand it. I must admit, upon first hearing about Bitcoin years ago I was very wary. Bitcoin and other cryptocurrencies remind me of a Ponzi scheme or other scam. It just seemed like voodoo and I thought it was creating money out of thin air.
I think it is a tough pill to swallow when someone changes our concept of money. If money is only virtual can it just disappear?
We have learned to trust banks; but it would not take too much of a disruption for that trust to be shattered. The foundation of money is the exchange of value and people’s perception of value.
The mighty dollar is recognized as a store of value the world over. The US stopped backing up the value of the dollar with gold decades ago. But, it is still the world standard and trusted currency.
What is Cryptocurrency?
Bitcoin was created in 2009 and is perhaps the most well-known of the cryptocurrencies; but there are over 1,000 other digital currencies.
Unlike the Federal Reserve System of centralized control of the banking system and money supply, cryptocurrencies are decentralized and use a blockchain transaction database as a distributed ledger.
There is no single entity, government or financial institution that controls the bitcoin or any cryptocurrency network. So, rather than a single “truth” ledger as used in a centralized system, the distributed system uses several thousands of points or ledgers and “people” (miners) to verify the integrity of the system.
This means it is exponentially more difficult to hack as there are thousands of copies that must agree instead of one central “location” of the data.
Best Explanation of Blockchain Technology
I didn’t truly understand or trust Bitcoin and have ignored it until I began to understand the blockchain concept of a distributed database and the implications it has for verification across many applications and industries.
Removing the “currency” aspect helped me to understand the implications without getting hung up on the money part.
I highly recommend watching the video below. This video by Anders Brownworth, is the simplest and best explanation of blockchain that I have seen to date:
Broad Real Estate Applications and Implications
I don’t know about you but watching the above video was a lightbulb moment for me. Seeing the demo as to how the actual records worked deepened my understand and allowed me to visualize its usage in so many other areas.
While I am not the smartest egg in the basket; if I can grasp the future implications then the really smart people can actually harness them and make them a reality.
The advantages of blockchain techniques are accurate, verifiable and public information.
Consider the current state of the real estate industry where title records are centralized and recorded at the county level. Distributing the information through a blockchain would eliminate any clerical errors and provide a streamlined history of property transactions.
Title insurance is prone to fraudulent targeting but blockchain encryption would improve security. This would also impact the title insurance industry costs and reduce risks.
Escrow could be handled through a blockchain rather than through an Attorney. Blockchain technology could validate property disclosures across many owners and over decades could be saved and easily retrievable. Global real estate markets would become more transparent, lowering risk and increasing liquidity.
Smart contracts are pre-written, stored and replicated with blockchain. They can be used for money, property or anything that can be shared, traded or exchanged.
The contracts are executed and run by the computers in the blockchain without the help of any 3rd party. Therefore, no one person owns the contract or has complete control of it. They enable trust by encryption on a shared ledger where all parties have access to them. They are redundant across the blockchain to prevent loss. They save time and money by eliminating the need for a middleman.
Ethereum is the most prominent public blockchain platform to use smart contracts. Smart contracts will be the future of negotiation; they will self-execute based on a set of instructions that two parties have agreed to. This code logic can include just about any of the- if this, then that – contingencies prevalent in a real estate transaction.
The National Association of Realtors have also explored and written about the potential of blockchains and real estate.
Real Estate Backed Cryptocurrency
In July 2017, REcoin was launched as the first ever cryptocurrency backed by real estate. Recently, the Securities and Exchange Commision (SEC) declared the offering a fraud designed to bilk unsuspecting investors.
A quick search also finds Share Estate, that allows you to invest in commercial real estate all over the world using blockchain. It uses the Ethereum platform and a closed end fund. Share Estate owners will receive SRE tokens that are backed up by real estate assets, share in the net profit of the commercial projects (through rent or eventual sale), able to use the underlying objects like booking a night in a hotel in the fund, the value of tokens will increase over time reflecting the underlying value of the real estate asset and provide voting rights for the holder toward planned project acquisitions.
Make no mistake, cryptocurrencies are here to stay. Witness over 1,574 bitcoin ATM’s installed all over the world by September 2017.
The IRS treats bitcoin as property rather than currency. So, bitcoin is subject to capital gains tax and scholars have agreed that the currency behaves similar to the precious metal markets.
Coinmarketcap.com reported in June 2017 the total market capitalization of cryptocurrencies is bigger than 100 billion USD and record high daily volume is larger than 6 billion USD.
REAL (Real Estate Asset Ledger) is another real estate venture using cryptocurrency. It crowdfunds real estate purchases where a group of investors, whom may not even know each other, buy shares similar to a Real Estate Investment Trust. The properties being crowd funded accept REAL Tokens or its in-house cryptocurrency. Pay outs are made in Ether a widely used cryptocurrency.
Streamline Rental Process for Landlords and Tenants
Rentberry is another blockchain related real estate application. It uses a long-term rental application built on consensus blockchain ledger technology. The company’s website describes its services as “a transparent home rental service and a price negotiation platform uniting tenants and landlords. It automates all the standard rental tasks from submitting your personal information, credit reports and custom offers, to e-signing rental agreements and online rental payments.” Rentberry is also an Ethereum based blockchain application.
Rentberry has over 100-thousand users and lists 160-thousand properties in nearly five-thousand cities in the United States.
Current Marketing to Bitcoin Buyers
A Philadelphia Condo community has advertised condos for sale at 795 bitcoins (over $342k at the market exchange rate at the time) to attract the segment and illustrate the validity of the currency.
Currently, the practicality of a total bitcoin transaction doesn’t fly. The title insurance company must comply with the “good funds rule” where money needs to cover all escrow items. A lender will not currently accept bitcoin to pay off a mortgage balance so bitcoin transactions are limited to where a seller owns the property without a mortgage. A transaction where the bitcoin is converted prior to completing the real estate transaction is always possible and has taken place in Texas.
A Dubai apartment complex is also being priced in bitcoin. The $332 million dollar project has two apartment towers and a shopping mail. Prices for a studio apartment started at 27 BTC.
Limiting Factors to Blockchain Adoption
Forbes recently wrote about the roadblocks for blockchain applications in real estate. The roadblocks are very real due to the lack of understanding by most people and entrenched industry incumbents whose entire reason for being would be threatened by the change. As applications using blockchain increase and people become more trusting and knowledgable, the technology will be applied to real estate.
Bitcoin magazine states cryptocurrencies are a significant challenge to central banks ability to influence the price of credit for the whole economy. Cryptocurrencies work without regard to national boundaries or policies.
Fraud and Criminal Use
While cryptocurrencies facilitate person to person exchanges globally, their nature has attracted a “criminal” or underground use from Ransomware hackers requiring payment in the currency to helping dwellers in the black market to evade taxes or launder money.
Unlike currency held in a financial institution, cryptocurrencies are more difficult for governments or law enforcement to seize and are favored by the criminal element to remain anonymous and undetected.
Over the last year bitcoin gained value and recognition. On Jan 2, 2017 a bitcoin was worth $985.56; as of Nov 6, 2017 a bitcoin was worth $6778.17. This would be quite a windfall for any real estate transaction defined in bitcoins from earlier in the year. However, like all markets what goes up can also go down.
The volatility of bitcoins, or how much the price changes over time, is much higher than most centralized currencies. Some experts warn that it is the next bubble that will burst.
Fundamentally, blockchain technology has many more applications that will affect our lives in far reaching ways. Cryptocurrencies is just the tip of the iceberg. Cryptocurrencies are in their infancy and will likely go though many changes in the future.
Blockchain technology can be applied even more broadly and has the potential to radically change much of how business and governments operate. Our lives and our jobs will likely be dramatically impacted over the next few years. Changes will not be limited to real estate applications. For this reason, it is important to begin to get a basic understanding of this technology and how it may be applied in the future.
Eillu real estate leverages the best in technology to provide the best service and value to our customers. While we are not advertising our listings in bitcoin, we always stay on top of industry and technological trends to provide first class services.