Are Developers Champing at the Bit?
Bitcoin in Everyday Real Estate
Bitcoin and its fellow cryptocurrencies have been making waves in the financial world for some time now. Originally created in 2009, the price for a single Bitcoin rose into the thousands in 2017 and in just the last few weeks skyrocketed to a high above $63,000. Tech giant Tesla recently purchased one and one-half billion dollars’ worth of Bitcoin. Digital currency exchange Coinbase (which works with Bitcoins and other cryptocurrencies) went public in mid-August on Nasdaq with an initial valuation of over $85 billion. The business-software company MicroStrategy and the payment company Square both have large Bitcoin and other cryptocurrency holdings, as do high profile individuals such a Bill Gates, Mark Cuban and Richard Branson. With continued interest in cryptocurrencies that saw a nearly 600% increase in the price of Bitcoin since the beginning of 2020, Bitcoin and other cryptocurrencies are beginning to achieve mainstream acceptance.
But there’s far more to Bitcoin than just the investment-related reports that dominate the national headlines. Over the last few years there have been a few companies, such as AT&T, Microsoft, Overstock and Twitch, that have started accepting Bitcoin as a means of payment, and there is now at least one major Southern California real estate developer/outdoor mall owner who will accept Bitcoin for the payment of rent and other items. While most people are currently using Bitcoin primarily as an alternative investment to help diversify their portfolios, some developers are already embracing Bitcoin for more than just the investment opportunity it offers, and are hoping to implement its technology in innovative ways. It’s likely that others will follow suit before long.
What is Bitcoin?
Bitcoin is one type of cryptocurrency, or digital currency (there are no physical “coins”) that can be bought and sold without the need for an intermediary such as a bank. Essentially, each bitcoin is a computer file that is stored in a “digital wallet” that exists either on a computer or in the cloud. Digital wallets are like virtual bank accounts that allow users to send or receive bitcoins, to pay for goods and services, or to save money as they would in a more traditional bank account. What makes Bitcoin and other cryptocurrencies different from traditional forms of money is that every Bitcoin transaction is recorded in a public ledger called the “blockchain” (discussed in more detail below), which makes it possible to trace the history of each Bitcoin and avoid fraudulent transactions. Bitcoins can also be spent anonymously – only an account number is recorded as part of a transaction – so no one knows who owns an account unless the owner wants them to know. Another important aspect of Bitcoin is that the creators of Bitcoin purposely limited the supply to just 21 million coins, and so, based on the law of supply and demand, most experts believe Bitcoin’s price in dollars (or other fiat-based currency) will continue to rise over time.
What is a blockchain?
To help understand what Bitcoin is and how it works, it is also important to have an understanding of blockchain. “Blockchain” is the technology that Bitcoin and other types of cryptocurrencies use. Essentially, it is a type of electronic record-keeping ledger that is distributed among thousands of computers as a “chain” of information, encoded into discrete bundles known as “blocks”. In addition to the information stored in each block (which might include, for example, information about a particular bitcoin or bitcoins and associated account numbers), each block is linked to the “hash” number that identifies the immediately preceding block, thereby creating a chain of linked blocks (hence the term “blockchain”). One element that makes blockchains so secure is that if someone were to tamper with the information in a given block, the tampering would also result in a change to the hash number of that block, causing the following block to no longer be linked to it, thereby exposing the tampering. The other element that makes blockchains so secure is their distributed nature. Instead of one centralized authority managing and confirming the accuracy of each block, blockchains use a peer-to-peer network. All computers in the peer-to-peer network have a full copy of the entire blockchain, and, when a new block is added to the blockchain, that information is sent to the peer-to-peer network, which then verifies whether the new block has or has not been tampered with. So, if someone were to try to tamper with a block, they would need to modify not only the block on their own computer, but also that block’s information stored on thousands of other computers, which would be difficult, if not impossible, to do.
The concept of blockchain is important, not only in its role in allowing Bitcoin and other cryptocurrencies to work, but also for its use in other record-keeping roles. For example, it could be used to keep the records of a chain of title for real property, or with so called “smart contracts” that are self-executing once certain specified conditions are met.
Bitcoin for Payment of Rent.
Real estate developers are beginning to move toward more mainstream acceptance of Bitcoin and other cryptocurrencies. In particular, one well-known Southern California real estate developer/outdoor mall owner announced a few weeks ago that Bitcoin will be accepted for the payment of rent (residential and commercial) at the shopping centers, apartments and other properties that this developer owns. Additionally, this developer intends to implement other innovative steps such as using blockchain technology to implement shopping rewards programs that will be more efficient, useful and secure than traditional rewards programs. This developer views Bitcoin as an “inevitable form of payment” that the real estate industry will soon be taking advantage of, and, in doing so, this developer is not necessarily focused on today, or even the next year or two, but is instead focused on the next decade. Over the next decade, it appears as if consumers may also be more likely to adopt Bitcoin and other cryptocurrencies on a mainstream basis. Therefore, it will likely be the case that those commercial property owners who have Bitcoin and other cryptocurrency policies in place will likely have a competitive advantage among shoppers and prospective tenants who also adopt the use of Bitcoin and other cryptocurrencies.
Not everything is coming up roses for the mainstream acceptance of Bitcoin, however. The prices of cryptocurrencies are highly volatile. Bloomberg recently reported that some fear that Bitcoin’s valuation swings, as well as Coinbase’s initial $85 billion market value, are part of an “unsustainable, stimulus-fueled frenzy”. On April 17, 2021, the value of Bitcoin plunged more than 14%, before rebounding slightly, causing the values of other cryptocurrencies to suffer similar large drops. Then on April 23, 2021, the value of Bitcoin and other cryptocurrencies plunged further as a result of a massive sell-off that wiped out over $200 billion of market value due in large part to the announcement that President Biden is expected to raise long-term capital gains taxes. This volatility creates a realistic concern that the Bitcoin that is accepted for rent on day one could lose a large percentage of its value on day two, and real estate developers will need to work out the means to mitigate this potential loss (although, of course, there is also the possibility that the value of the accepted Bitcoin might instead surge on day two). There is also concern that U.S. regulators may be ready to tighten their oversight of digital currency and related businesses, which may have a chilling effect on cryptocurrency-based transactions. Ultimately, mainstream acceptance of Bitcoin and other cryptocurrencies will mean accepting these risks.
Nevertheless, despite its volatility and potential for future regulation, cryptocurrency appears to be here to stay and to become a mainstay in our everyday activities, including in commercial real estate.