Cryptocurrency Makes an Impact on Real Estate
Nowadays, people would be wise to familiarize themselves with cryptocurrency, Bitcoin, and other digital currencies. These new instruments of doing business may become the wave of the future. Try not to be intimidated by it, but instead take some time to tackle the subject.
But a brief word to simplify the concept is in order. Bitcoin, Litecoin, and a multitude of others are names of digital currencies (aka cryptocurrencies). There are currently over 1,300 in circulation. The easiest way to conceptualize it, is that a digital currency is something that you never touch or hold. Think of it as you would money in your PayPal account that you may transfer, but never touch, see, or feel – or cash reward points on your credit card. You can grow it, transfer it, or spend it, but it is virtual. One other term is important to know: “Blockchain” is a system in which a record of transactions made in digital currencies are maintained across several computers that are linked in a peer-to-peer network. Also, we can, on our computer screens, access blockchain to see what’s going on with our Blockchain account and other concerns.
Blockchain has already impacted many industries, particularly financial services. It’s hard to find a sector in our economy which has not been affected by this new technology. Across industries, cryptocurrencies have made a strong impact on payments , remittances, and foreign exchange. Even venture capital is feeling the effect of this new technology.
Indeed, real estate has not escaped the blockchain disruption either. Traditionally, real estate transactions were done exclusively offline and face to face with the various entities involved (buyer, seller, mortgage lender, title insurer, etc.). But now, Blockchain has altered this mode. The introduction of smart contracts on Blockchain platforms now permits real estate transactions to be virtual.
How Specifically Has Blockchain Affected Real Estate?
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The sale and purchase of real estate is/was primarily done through listings – connecting buyers and sellers. But Blockchain introduced new ways to execute real estate deals through trading platforms and online marketplaces. By tokenizing real property (Bitcoin, for example), assets can be traded much like stocks, and transactions can be executed online.
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While brokers will probably always be necessary to guide a client through the complex labyrinth of a transaction, avoid costly mistakes, and assure a client that they are making the right sale or purchase, the use of other intermediaries such as lawyers (think Legal Zoom), and lenders (think Turbo Tax) can be lessened. Eliminating intermediaries will save buyers and sellers fees during transactions. Also, transacting online will save time and avoid the back and forth between lawyers, mortgage lenders, title agents, etc.
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Liquidity is one clear advantage in Blockchain’s favor. Real estate is an illiquid asset as it takes considerable time to reach the closing phase when funds become available to the seller. The buyer, as well, often needs time to sell one property to have the necessary funds to purchase another. However, cryptocurrencies, can be traded through exchanges. A seller, for example, doesn’t need to wait for a buyer who can afford the whole property in order to get value from their property (see #4 below).
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By allowing fractional ownership, Blockchain also lowers barriers to real estate investing. Normally, for example, investments require a significant down payment to purchase a property. Through Blockchain, investors can pool money to acquire more expensive properties. By using Blockchain, investors can use a trading app to buy and sell fractions of a property. Additionally, fractional ownership significantly reduces the burden of fees associated with managing a property, not to mention maintenance and leasing.
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Blockchain offers decentralization and transparency. Information stored in the Blockchain is accessible to all on the network. Transparency is always a good thing. If we recall the Great Recession of 2007/2008, in addition to greed, the lack of transparency allowed things to spiral out of control, away from the eyes of regulatory agencies who could have interceded.
Finally, a word of caution: Potential investors or sellers should not attempt to use this new technology without thoroughly understanding it. And while Blockchain offers the advantages listed above, it is only a matter of time before unsavory operators develop sophisticated scams in an attempt to con people out of their hard earned money.