Trading real estate for bitcoin and vice versa is becoming more common. More and more property developers are starting to accept bitcoin, bitcoin-backed mortgage companies are starting up, and individual transactions are rising. But what are the pitfalls and opportunities for both sides? Let’s take a closer look.
Nestled about halfway down on the south side of a cul-de-sac, just a block in from the freeway, this two bedroom bungalow looks rather ordinary but a recent sale changed that. Now the 700 SF two bedroom home is making international news because it was paid for with 1 Bitcoin.
The last few weeks have also allowed us to witness the purchase of an apartment home in Portugal for 3 BTC. What is interesting about both of these stories is that the agreement for the properties in question utilized Bitcoin for valuation of the real estate. Unlike most, if not all other real estate transactions that have involved the world’s most sound form of money, these two acts of trade did not convert the Bitcoin into a local currency.
What happens when the price of Bitcoin Changes?
Last year’s high price of $68K+ USD and the trend of summer 2022 which at the time of this writing has seen Bitcoin trading below $18K USD, could compel the question to be asked, did the individual who sold the house get the short end of the stick? To properly answer that question considerations should be given to the subject of value and also the nature of investing.
How are things valued in general? The simple answer is through supply and demand based trade. What did basketball or hockey trading cards sell for in the 1980s? If my memory serves me correctly they were typically between fifty cents for a basic package or perhaps at most for premium editions two dollars. So about $0.10 – $0.50 for a single card.
In the case of certain years, some of those packages would have included a Michael Jordan or Wayne Gretzky rookie card. In 2021 a 1979 O-Pee-Chee mint condition Gretzky fetched a cool $3.75M at auction. In order for a sports card to multiply in value many times over there must have been a growing demand for something which was increasingly scarce.
Over time, the availability of a historically minted sports card, in perfectly new condition, that depicts the likeness of a player who for 40+ years has been undoubtedly the best to ever lace up a pair of skates has declined in its likelihood of having an equal. Evidently, the sports fan in question was willing to put up an enormous sum to secure that rare Gretzky rookie card and thereby created demand for such a unique collector’s item.
In a case like this, surely some would question how the value of a 10 cent hockey card is decided to be in the multimillion dollar range. It is really no different when it comes to houses or Bitcoin. A seller accepts a price from a buyer who perceives the market alternatives to be undesirable for the same medium of exchange and in that act value is applied.
Timing Is Not Everything
Another way to look at the valuation of Bitcoin is to contemplate it in the light of timing. Suppose the buyer of the 1BTC house in Kentucky had obtained the Bitcoin through a USD purchase on an exchange in November of 2021.
Twitter was buzzing as Bitcoin reached all time high valuations compared to dollars. That individual may have thought there would never be a chance to jump into owning Bitcoin for so low a price again. In that light the clear ownership of 1BTC might have required some nearly $70,000 USD.
Now fast forward to March 2022 that same person saw Bitcoin trading close to $50,000 USD and thought, “I don’t want to sell my BTC and realize a loss of $20,000 USD, but the lease is up on my apartment and this house would suit my needs. I would be giving up the BTC I bought last year, but I would have a great place that’s my own and pay neither rent nor mortgage interest.”
Perhaps the seller stood back and thought, “I paid $35,000 for this house 5 years ago and while it hasn’t sold for $60K like I thought it might this buyer is willing to give me 1BTC, which is worth around $50K so that seems like a pretty good deal.”
Now consider some of the possibilities about the future. Is it possible that by spring 2023 Bitcoin has rebounded from current lows and could be trading close to $100K USD? What effect will rising interest rates have on home prices? All the experts are currently suggesting as much as a 30% correction in the real estate market is a strong possibility. That same house in question may be valued at $45,000. Would the seller who accepted 1BTC this past March, in a year from now be feeling regret? Obviously not.
There is naturally a celebration of real estate, a solid and proven asset, being traded for Bitcoin. This maturation of value consideration ultimately serves to further strengthen the overall acceptance and recognition of Bitcoin as hard money.
Yet as the confetti settles around the subject of real estate transactions, it also raises one major cautionary consideration for many Bitcoiners. Buying and selling real estate is not nearly as privacy protected as Bitcoin.
Anonymity in most places is not legal. While measures can be taken to protect a buyer’s identity from publication to the general public, avoiding KYC (know your client) requirements of the government, in most developed countries, is impossible.
Legislation in the west has not fully recognized a process to record the accumulation value of Bitcoin. This is significant because the purchase of real estate will certainly mark a disposal value of the Bitcoin and most tax systems will require capital gains be paid on the difference. As of yet it is not clear how proof of acquisition price will be calculated in most developed economies.
Bitcoin Lending and Block Chain Financial Products
Discussion of concepts surrounding Bitcoin as security for fiat currency lending have been on the rise in recent months and some have included mortgages. A number of startups offer options to buy homes on credit with bitcoin as a collateral. Many of the companies require no credit line or personal documents as the loan is the security provided in the form of bitcoin leaves no questions open about the credibility and creditworthiness.
What remains most significant in observing a real estate transaction with Bitcoin is the increased usage of it as a medium of exchange. The recent turmoil within the shitcoin industry has illuminated the importance of real value over and above any hype.
Virtually all of these other “currencies” are lacking in that they fail to convey permanence; their values only exist in frenzied yield trading exchanges. Bitcoin is altogether different. As the current cycle continues and “securities” become more widely known as anything but secure, Bitcoin is expected to emerge as the absolute winner as a store of value over time.
That house might have been the first real estate sale in Kentucky for Bitcoin, but it won’t be the last.