If you’ve been hearing about Bitcoin in the news but have no clue what it means, or how it will affect commercial real estate, you’re not alone.
The new cryptocurrency phenomenon has applications that go beyond the stock market, with real-life applications for commercial property investors. Because it offers a high security and transparency, it’s bound to become increasingly important to investors seeking to share sensitive information.
However, in order to understand what Bitcoin is, first you need to understand what blockchain technology is.
What Is Blockchain?
All data online is stored in a database. Often, this means the stored data is susceptible to hackers, who continue to upgrade the sophistication of their methods.
Blockchain circumvents all of the problems associated with storing data online by storing data in a shared database that is constantly reconciled. Think of it like a shared Google document: as you and other people add information to the document, the document itself is being continuously updated in order to reflect the changes made.
Whenever a new transaction takes place, it is first verified by the system, and if approved, a “block” of data is created added to the chain of data already stored – hence the term blockchain.
Furthermore, because the data isn’t stored in any single location,but in fact is hosted by millions of computers at the same time, there is no one location for a hacker to corrupt. It also eliminates human or machine error, since all data is easily verifiable by checking one record against all the other records in the system.
Thus, blockchain becomes an un-hackable, incorruptible method of recording transactions.
Blockchain for Commercial Real Estate
While Blockchain can be used for financial transactions, it’s also perfect for any transaction or exchange of information. That means investors will in the not to distant future be able to use it for contracts, storing information about tenancy, or monitoring cash flow.
Due dilgence becomes a lot easier when reliable information such as property ownership, liens, tenancy,insurance information, and financing becomes available through blockchain. And for investors who are especially concerned about information being shared without their permission, blockchain’s digital identities and system for storing data are essentially infallible.
Practically this means Blockchain has the potential to greatly speed up the length of time it takes to complete a deal. The ability to investigate a property thoroughly, and with full confidence of the validity of the information would be invaluable for most investors.
Using Bitcoin to Buy CRE?
Bitcoin is a form of digital currency that uses Blockchain technology. Although there are other forms of digital currency, Bitcoin is the first to become decentralized.
This means that while money is traditionally held by private institutions like banks, in which the bank holds sole control over all transactions, Bitcoin transactions are stored on thousands of networked computers around the world.
In order to maintain security, Bitcoin is encrypted by an algorithm so it can safely be passed between two people. Each unit of Bitcoin has a unique code created for it, and every Bitcoin is owned by someone.
Each individual in the Bitcoin ledger has a unique code as well. This code is their wallet. Bitcoin is not a product you can buy; instead, anyone who donates their computer’s power to support the system receives Bitcoin in return. You can’t buy Bitcoin, therefore, unless someone sells it to you.
Bitcoin is considered unhackable because each transaction must be verified before it can go through. Remember, each transaction has a unique code, and because information is shared between thousands of computers, the system checks each computer to ensure the same code hasn’t been used elsewhere.
If the system sees that the same code has not been used in another transaction at the same time, then the transaction goes through. It would be almost impossible to hack the system, since that would require you to change the Blockchain at half of the computers storing the information – at the same time.
Bitcoin Is Already Being Used In CRE Transactions
At present, Bitcoin is widely accepted by the restaurant and retail industry, and there have been several transactions where Bitcoin was used to pay for real estate.
For example, the co-founder of the Bits to Freedom website, Ivan Pacheco, $275,000 in Bitcoins (17.741 bitcoins) to buy a two bedroom condominium in Florida. Other investors – usually young, tech-savvy, and who got into cryptocurrency in the beginning, and thus own significant amounts of Bitcoin, are following his lead.
In commercial real estate, the Liberty Toye condos on the Lower East Side of Manhattan will allow buyers to purchase a condo with Bitcoin, and New York City based Brookliv and a Beverly Hill based venture company are accepting Bitcoin for paying rent.
Despite this, many investors are still wary of using Bitcoin. Although there are some states that allow Blockchain technology to prove property ownership and even be involved in transactions, investors must still use regular currency to pay for some expenses, like a real estate attorney.
And although some investors look at the volatility of Bitcoin and see potential, others see risk. Bitcoin plunged 40% in value at the start of the year, and Google has announced they will no longer allow cryptocurrency ads, which caused the price of Bitcoin to drop even further.
While it looks like it might be quite some time until Bitcoin becomes accepted as a standard form of payment in commercial real estate – if at all – using Blockchain for other transactions is likely to occur in the near future.