Over the past two years, interest in Bitcoin, cryptocurrencies, and blockchain technology has skyrocketed across many industries. There’s been an astronomical level of investment in these new financial technologies, especially from venture capital firms, banks, and tech companies. While cryptocurrencies have attracted hundreds of millions of dollars of speculative investment, many laypeople are struggling to wrap their heads around what the technology actually is—let alone understanding its implications, or its applications.
WHAT IS CRYPTOCURRENCY?The first important term here is the blockchain. The blockchain is a structure that stores information packeted in digital “blocks”. What makes the blockchain unique is its storage mechanism and its security—the blockchain has no centralized storage location. It’s collectively stored by a network of participating computers. Each block contains all previous transactional information. This decentralized aggregate structure makes it a very secure, archival method of storing information compared to a typical bank or database.
The blockchain can store any kind of information—not just financial transactions. This is why there has been interest in the blockchain across many industries; those who are bullish about the technology believe it could be used to house medical records, verify documents, vote in elections, store files, encrypt messages, and so much more. However, by far the most well-known use of the blockchain has been to create, store, and circulate cryptocurrencies. A cryptocurrency is a currency that uses blockchain technology. The blockchain stores information about all previous transactions, while the cryptocurrency accrues value according to its circulation, its usage, and the processing power used to maintain the associated blockchain. Bitcoin not the only cryptocurrency (other popular cryptocurrencies include Ripple, Litecoin, and Ethereum), but it is the most popular one, with 1 BTC currently valued at $6,615.04 (although its value fluctuates wildly).
Some industries such as the tech industry have been more enthusiastic about cryptocurrencies. It appears that the real estate industry is warming to the technology; in September of 2017, Sotheby’s sold its first home paid for entirely with Bitcoin. More recently, in May 2018, the first Ethereum-based real estate deal was conducted in Vermont.
The present and future of cryptocurrency and real estateCrypto-fanatics are oftentimes overambitious about the potential of cryptocurrency to completely overhaul and transform an industry. In fact, as Rachel Wolfson writes for Forbes, “using Bitcoin for real estate transactions will not result in widespread adoption … until the real estate industry starts to utilize blockchain technology.” In other words, to use Bitcoin as fiat currency (as some are doing to purchase homes) is to miss the point, since the potential of cryptocurrency is linked to the kinds of transactions enabled by the blockchain.
What this means for real estate is that more aspects of the industry will have to be refigured for blockchain before we see widespread usage of cryptocurrencies to purchase homes. Wolfson describes this as a shift from cryptocurrency to a cryptoeconomics approach, in which all aspects of real estate, from putting a home up for sale, to searching for a property, to transferring a deed, to authenticating transactions, to maintaining a lease, etc., are all conducted using blockchain technology. It’s also worth noting that other cryptocurrencies might be more optimal than Bitcoin for real estate transactions (the cryptocurrency XRP has recently made a name for itself as a preferred option for real estate agencies). Once these structural changes start to become more widespread, then surely more transactions using cryptocurrency will follow.
However, the adoption of cryptocurrencies for real estate will not be without its risks. The decentralized nature of the blockchain has made it prone to thefts, despite security being the technology’s main boasting point. Some individuals have been locked out of millions of dollars worth of Bitcoins because they lost their private key, either due to a clerical error or unexpected disaster like a hard drive crashing or water damage to a home. In other cases, the selling points of cryptocurrency—namely its efficiency and its ability to eliminate the middleman—are also its biggest flaw. Working outside of banking institutions to secure real estate deals can lead to nefarious scams, and both the speed and the speculative nature of the currency has made it highly volatile. If you were trying to sell your house, would you accept payment in a currency that can lose value by thousands of dollars in mere minutes?These factors haven’t prevented a handful of ambitious fintech startups from pursuing new innovative ways to introduce cryptocurrency into real estate. The most notable example of this is Propy, a platform that sells homes using the Ethereum blockchain and seeks to entice users into using cryptocurrency for its transaction by offering financial incentives and digital tools that make the process simple and far less nebulous. Overall, the examples are few and far between, but this won’t discourage investment. As Nathaniel Popper recently wrote in the Dealbook section of The New York Times, the recent historical parallel for this crypto-craze is the dot-com boom, which cynics dismissed as a bubble. It laid the groundwork for the ascendance of the most powerful companies today such as Google and Amazon. As Popper notes, this era was not without its calamitous failures, and when it comes to real estate, it’s simply too early to tell who will be the winners and who will be the losers.