In 2017, the first entire real estate transaction via bitcoin was completed in Texas. The broker, satisfied with the process, said, "In all of my 33 years of closing transactions, I honestly couldn't have expected something so unique to go so smoothly. In a matter of 10 minutes, the bitcoin was changed to U.S. dollars and the deal was done!”
Cryptocurrency is moving into the mainstream as a payment and exchange option. But what exactly is it?
In short, it’s digital money that you can send anonymously to anyone on the planet without going through a bank. It’s merely a token used to exchange goods and services. And, like any money issued by a government, cryptocurrency only has value because its users believe it does.
The difference is cryptocurrency doesn’t take a physical form. Proponents of cryptocurrency argue these online-only currencies are in many ways just a newer version of writing a check or using a debit card via the internet, but with a few significant differences.
Cryptocurrency: The Basics
Bitcoin; the world’s first true cryptocurrency; was created in 2009 by Satoshi Nakamoto: a pseudonym for an individual not publicly known.
Money is all about a verified entry in a database of accounts, related balances, and transactions. Satoshi’s significant innovation was to achieve consensus without a central authority. Cryptocurrencies are a part of this solution.
Cryptocurrencies are entries through tokens in decentralized databases or ledgers. These are called cryptocurrencies because the process is secured by strong cryptography.
There are now more than 1,500 cryptocurrencies including Ethereum, Ripple, and Litecoin. The list will continue to evolve; in fact, Sweden and China are among the nations that have announced plans to launch their own official cryptocurrencies.
Cryptocurrencies are created and controlled by computer programs – algorithms – that determine how new coins or tokens are found and released and how transactions are made and recorded, according to Nasdaq.
Transactions are recorded between users via blockchain (encrypted, public, decentralized digital ledgers) rather than centralized through the banking system. Each user has a cryptocurrency wallet – a software program – that stores the public and private keys and interfaces with blockchain to conduct transactions. To access the cryptocurrency, the private key code in a wallet must match the public address that the currency has been assigned to.
Users are hidden, but transactions are completely transparent. Everyone using a cryptocurrency blockchain can see every trade that has ever been made. Each type of cryptocurrency coin utilizes a separate blockchain.
Tokens – digital assets – are created via initial coin offering (ICO). An ICO sells tokens to fund a project, often related to the blockchain. At the time of purchase, the token likely has no value. Some tokens may be exchangeable for a new cryptocurrency to be launched, while others entitle investors to a discount or early rights to a proposed product or service.
- Fast - Confirmation is a critical concept in cryptocurrencies. Whereas banking transactions can take days to confirm, cryptocurrency transactions are confirmed within 10 minutes to an hour. The transaction is known almost immediately by the entire network.
- For everyone - Any person on the planet can use cryptocurrency: there are no rules about who can or cannot have an account.
- Secure - Because a cryptocurrency blockchain network is spread over thousands of computers, it is nearly impossible to hack.
- No double spending - There are no overdrafts or reversed transactions: cryptocurrency prevents one user from spending the same amount twice.
- Deflationary - Cryptocurrency removes central banks from managing the money supply. Over time, banks tend to reduce the value of money via inflation. Here, the total amount of any cryptocurrency in circulation is limited.
- Appeals to the tech-savvy - Home buyers in tech-related industries, including early adopters who benefited from the sudden increased value of some cryptocurrencies, may request cryptocurrency-only real estate transactions.
- Unstable - If the cryptocurrency you own becomes unpopular, you might not be able to use it.
- Irreversible - If cryptocurrency goes missing, an error is made in the public key, or you lose your private key, you can’t get it back.
- Unsecured - The federal government does not insure cryptocurrency accounts.
- Fraudulent ICOs - The federal government has been investigating ICOs and has accused several companies of fraud.
- Criminal element - Cryptocurrencies are sometimes used as a medium of exchange for terrorists and criminals who want to avoid a paper trail from them to their transactions – and governments are cracking down.
- Not common - Buyers and sellers may not know enough about cryptocurrency to be involved in a transaction that involves it. This may cause the other party to walk away.
Cryptocurrency has the power to reshape the way real estate is done, but the future is still largely uncertain.
Adi Pavlovic, director of innovation at Keller Williams, shares, “The technology is still in its infancy. Until there’s some type of regulated blockchain framework, there’s not much opportunity for cryptocurrency in the residential real estate transaction for the average buyer and seller. It will be interesting to see how it evolves.”