Using alternative currencies to buy property – an ode to the growing acceptance of cryptocurrency in the mainstream
Cryptocurrency sent ripples across the global economy in 2017, with Bitcoin rising from $900 per unit to a record high of $19,783, within the year(1). Currently hovering at a relatively sedate value of around $9100, Bitcoin has survived several headwinds and tumultuous trading days, over the past year or so. The U.S. Securities and Exchange Commission (SEC) okayed the IPO of pro-crypto Silvergate Bank, on 8th November 2019, and its shares are now being traded on the New York Stock exchange. Even though opinions are still divided, to some extent, markets seem to be becoming much more receptive to cryptocurrencies, than they were only a few months ago.
Buying real estate using Bitcoin, or other popular cryptocurrencies like Ethereum and Ripple, is emerging as an attractive proposition for investors who want to invest their gains in more mainstream and stable assets. In turn, real estate markets are also currently a lucrative option because prices are subdued but stabilizing, in several of the most sought after locations in the world. Many investors who got into cryptocurrency markets at their outset now have stakes with a large dollar value, and are hoping to liquidate their holdings and diversify into real estate. Perhaps the biggest factor driving the influx of investments from crypto-markets to real estate is ‘tokenization’.
Tokenization, in a real estate context, can be defined as representing an ownership interest in a property, on the basis of a cryptocurrency-backed token. While the strategy is applicable in other asset classes as well, tokenization is finding a significant number of takers in real estate. Developers seeking buyers for a million dollar property have a better chances of selling the property when it is tokenized. It’s much easier to find ten buyers, with $100,000 each to spare, than someone with $1 million. The approach creates a wider pool of investors, since anyone with the minimum investment permitted and an internet connection, can invest.
Blockchain technology facilitates the management of tokens through smart contracts, which reduces costs and promotes ease of doing business. As far as security is concerned, high level encryption provides investors with an extremely secure record of all past and present transactions. By converting fractions of real estate holdings into tokens, and enabling them to be traded on a digital exchange, developers can gain access to funds and investors to monetized and stable real world assets. Blockchain-based tokenization of real estate is perhaps the strongest current driver of cryptocurrency and Harbor, a security token platform, has already tokenized $100 million worth of real estate.
Cryptocurrency as an alternative currency
Perhaps one of the most crucial enablers of this convergence between cryptocurrency and real estate is that sellers in leading real estate markets are warming to the alternative currency. In a property sale that happened in early 2017 using Bitcoin, a seller reportedly made an extra $1.3 million, after Bitcoin valuation went from $750 to $1,000 overnight(2). Several such instances were recorded that year, on the back of Bitcoin’s meteoric rise. As a consequence, property developers in the UK began accepting payments in Bitcoin. In the couple of years since, developers from Dubai to Bahamas have jumped on the cryptocurrency bandwagon and BitPay, a Bitcoin payment service provider headquartered in Atlanta, has made rapid inroads into the US real estate market. The firm accepts Bitcoin payments from buyers and transfers U.S. dollars to an escrow agent, on their behalf. BitPay is now the world’s largest payment processor for home buyers using Bitcoin, and has expanded its business to around $1 billion in yearly transactions(3).
Bricks and Mortar for Bitcoin in Dubai
Based on several media reports, a few developers in Dubai are offering off-plan properties in exchange for Bitcoin payments. Although it is likely that, upon receiving the cryptocurrency payment, the developers convert it into a traditional currency, the facility provides market access to investors who happened upon a large cryptocurrency holding, prior to its boom. With favourable visa and ownership regulations, and long-standing reputation as one of the world’s top real estate destinations, Dubai has an established edge over most markets.
The Dubai Land Department is incorporating Blockchain, to draw up smart contracts and other documentation. MAG Lifestyle Developments and Driven Properties in Dubai are among the known developers accepting payments in Bitcoin and other cryptocurrency variants, especially the Islamic OneGramCoin. The trend could push the Dubai government to devise a legal and regulatory framework for cryptocurrency-based real estate transactions, which safeguards the interests of all stakeholders.
As a more convenient alternative of exchange, especially in transactions involving large sums, cryptocurrencies add a new dimension to the buying and selling of real estate. Notwithstanding these advantages, real estate markets still have to overcome some resistance before cryptocurrency purchases become commonplace. A mere 3% of respondents, to a comprehensive survey conducted by Bayut, expressed interest in using cryptocurrency for property transactions(4). However, a resounding 52% expressed interest in investigating the worth of a property in cryptocurrency. This indicates the presence of interest but a ‘wait and watch’ attitude. As the Blockchain revolution becomes imminent in Dubai the trend could soon shift, especially if it is propelled by government intervention through the creation of a regulated framework.