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Crypto-Backed Real Estate: How a New Trend Impacts an Old Business
As financial coaches and fiduciary financial planners, some of the most challenging questions we receive at SeaCure Advisors, especially from our younger clients, are about cryptocurrencies: What are they? How do they work? Should I own them in my portfolio? What should I use them for?
The first and most important thing to understand about crypto is that it is, by definition, not an investment. You are not contributing capital to a person or business. You will not be earning returns based on the efforts of others, nor will you receive dividends paid out of corporate profits. You also won’t own anything tangible, like gold or silver (both of which also have uses in technology, fashion, and other industries). Nor is cryptocurrency even really a currency. Rather, crypto is both the platform where parties can exchange currency, and the currency itself. In the case of Ethereum it is even a software development infrastructure.
Crypto is so new that the world at large is still figuring out what to do with it. Bitcoin, the oldest and most mature cryptocurrency, recently experienced a 50% price drop over a few short weeks. The drop was spurred by only two events: a tweet from Elon Musk that raised concerns about the environmental impact of the computational overhead it requires, and the Chinese government declaring that it was banning the use of all cryptocurrencies in China.
This means that despite its age, Bitcoin, and by proxy all other cryptocurrencies, are incredibly speculative, poorly understood at large, and still struggling to integrate in a stable way with the global economy. One tweet should not be able to so negatively – or positively – impact the value of something if its value is widely understood and recognized. Something that is materially beneficial to people should not be banned by the world’s most populous country. All of this is to say that it would be exceptionally risky to hold cryptocurrency in more than a very small portion of one’s overall portfolio. One should not, for example, forgo a contribution to a Roth IRA in favor of buying some crypto.
This is not to say that crypto should be avoided by everyone. As with any significant purchase, it is critically important to understand the underlying “why” behind it. The internet is full of tales of Bitcoin or Ethereum millionaires. As a result, many people view a cryptocurrency purchase like buying a lottery ticket. If your only “why” is “to grow my wealth as fast as possible,” you are playing the riskiest of all financial games.
In order to understand it better and be able to communicate effectively with my clients who are interested in crypto, I bought a small amount towards the beginning of 2021. I’ve watched my account initially drop about 20%, climb nearly 40%, then drop over 50%. And this is all in a matter of a few months. If investing is a rollercoaster, this feels like flying a cessna through a hurricane.
Despite my reservations about it, I do believe crypto is here to stay. The transaction ledger technology Bitcoin developed – called blockchain – has been implemented worldwide at enormous companies spanning nearly every industry. Rather than avoiding crypto altogether, I think it is more productive to think about how much of it is appropriate in one’s portfolio, and how one intends to use it. If the goal is to use it for a purchase, there is a lot to consider.
Some people are turning to crypto as a means of buying real estate. People who had good luck with the timing of their crypto purchase may find themselves looking to their crypto wallet as the best source of funds to make this purchase. Since buying a home is one of the largest purchases a person can make in their lifetime, this is worth a very close look.
Cryptocurrency, originally used for online transactions for goods and services, has now become a phenomenon that is changing the way the globe manages and interacts with money. There are now nearly seven thousand different cryptocurrencies with each varying in popularity, usage, and value. While crypto is notorious for its fluctuation in value, more people are deciding to invest traditional money into these digital coins.
Purchases of property using crypto have already been documented, and the number of such transactions is growing. The largest real estate purchase on record in the US was over 2,000 bitcoin, or around $1.5 million at current valuation via the BitPay service. If you happen to own crypto assets yourself, the start to moving your coin into the property market is quite simple. The key factor behind any real estate deal is finding a party that is willing to transact using crypto. Most will want the crypto converted into US dollars during the deal, but some will accept direct payment with the coin itself.
While real estate deals backed by cryptocurrency are still a rarity, they are still worth looking at when considering your investment options. Why? For starters, owning crypto coins as well as real estate is a diversification of assets that can provide great returns depending on which currency and property you choose. All investments carry inherent risk but having a hand in both arenas can hedge against loss in either. Say you have a valuable crypto asset that has grown recently. If you want to shore up those profits, a move into the more stable real estate markets could be favorable in the long run.
Even better news: more and more banks are recognizing crypto as valid collateral for things such as mortgage loans, which means that it will be easier to complete real estate purchases as time goes on and the crypto market stabilizes.
For every benefit that comes with crypto-backed real estate deals there is a potential downside worth considering before going forward with such a venture. Banks that do accept crypto will want to see extensive documentation of the initial purchase of your coin and any subsequent sales of the coin in order to use your crypto as a down payment or to qualify for a mortgage.
Additionally, the same volatility that saw some forms of crypto dramatically rise in value over the years has also brought dramatic losses. It is entirely possible to pay for property using crypto only to have the seller reap the benefits of the currency’s appreciation. It is also equally possible for your coin’s value to drop precipitously at the worst possible time, forcing you to make other plans for your real estate purchase.
Finally, due to the largely unregulated status of crypto these days, taxes surrounding the asset can be complex. Capital gains taxes do apply for spending, trading, or exchanging crypto. A trusted CPA should be consulted before you make any major real estate transactions using your coin.
Is using crypto for real estate the right move for you? Well, it all depends on your needs, investing sensibilities, and willingness to perform due diligence. For most Americans, the old-fashioned dollar is still king when purchasing and selling property. But for those who believe in the growing buying power of cryptocurrency, real estate could be the next frontier that this new financial force conquers.
