A reflection on the role of cryptocurrencies in Real Estate

A few days ago, just before the end of 2021, I was at an online congress in which I coincided with several colleagues. In it, the future of Real Estate was discussed and how the implementation of technological innovations is affecting, in one way or another, the sector. Among the topics raised, I found quite interesting the presentation of Dr. Neil Pennington, senior advisor of strategy and innovation at Idoneus, a company specialized in economic advice for companies in the luxury sector. Dr. Pennington's talk orbited around how the use of cryptocurrencies can maximize the value of real estate operations and bring benefits to investors in Real Estate.

Between festivities and small gatherings with family and friends, Dr. Pennington's words were dancing in my head generating an internal reflection on the subject; a reflection that I have decided to share with you in my first article of the year.

Contextualizing momentum

Real estate markets, although the trend is increasingly optimistic, continue to be affected by a time of unprecedented change. From climate change to the COVID pandemic, to the devaluation of currencies around the world as governments "print" their way out of economic problems, we face different factors that offer new challenges for buyers, sellers and agents.

In these circumstances, it is tempting to adopt a more pessimistic view of the world. However, experience, professionalism, perseverance and, today, technology (in particular blockchain and cryptocurrency), offer us more than one reason for optimism in the search for the total value of assets, including real estate.

As explained by Dr. Pennington, Real Estate professionals and investors must think differently about the value of a property to facilitate its sale and ensure the fairest possible value, thus avoiding value leaks.

Cryptocurrency as an alternative to traditional payment and acquisition systems

An initial note: the global cryptocurrency market is worth approximately $2.5 trillion, slightly less than the total size of the Indian economy. The vast amount of wealth that cryptocurrencies have accumulated over the years also underscores how digital currencies are becoming popular around the world. Although bitcoin continues to be the current leader within the virtual currency world, with around 42% of the market share, research suggests that there are approximately 14,500 different cryptocurrencies active in the world.

If we consider that the total number of cryptocurrency users doubled in the six months from January to June 2021, from 100 million to 200 million (according to the Crypto.com report), we have a very clear indication about the fact that cryptocurrencies are gaining a more than notorious momentum within our culture and society.

The Real Estate sector has proactively warmed up in recent years with the support of technology, reversing the prolonged agnosticism that seemed to show for some years now. The merit of this is also due to the multiple iterations that helped trigger the digitization of real estate services around the world. Let's think that, today, real estate leaders are actively investing in cloud-based technologies, AI and ML-based analytics platforms, virtual reality, marketing automation specialized in Real Estate, among others.

Within this paradigm where innovation and Real Estate are found, Blockchain, the mother technology of cryptocurrency, has shown some limited but profound applications in the real estate sector worldwide. Based on the DLT system (Distributed Ledger Technologies), blockchain can be seen in Blockchain, an encrypted platform capable of facilitating secure and transparent real estate transactions, especially in fractional ownership of commercial assets, rental houses, holiday homes, etc.; facilitating, in turn, cross-border transactions.

A reflection that I do not wish to leave on a mere theoretical level. After Dr. Pennington's lecture I was looking for relevant examples of the use of this mode of acquisition within the sector finding cases as interesting as the case of the purchase of the ninth floor of the ARTE building (Miami), by Penthouse, paying its total value in cryptocurrencies, for a stock market value of 22.5 million dollars.

Let's continue with my general reflections: In times of economic uncertainty, the smart investor is the one who realizes that cash is not king; the real king is the active one. Value can be maintained and improved by focusing on assets, as cash loses value and purchasing power steadily. Acquiring and holding assets is the route to profit. With this consideration in mind, the real tipping point happens when buyers, sellers, and real estate agents realize that cryptocurrencies, as a new digital asset class, can be used to route themselves into new and different opportunities to get the most value from physical assets such as, in the case at hand,  real estate.

Connecting tangible value with digital

At this point in the reflection, I would like to clarify that what I am exposing in this article is more an exercise in consideration within a scenario that we cannot ignore, but in which prudence and patience must also be wise travel companions. It is true that Blockchain and cryptocurrencies could be potential levers to completely reinvent real estate transactions, but there is still much to be defined about the volatility of the value of it.

Even so, and being aware of this reality, I would like to continue in my settled speculation on the use of cryptocurrencies. With its use, Blockchain could bring an advantage to ongoing data analysis within the real estate sector. The main categories of data, such as projections and historical, zone information, price trend analysis, future price forecasts, etc. can be integrated into the system of any Real Estate investment company to provide incisive information to buyers and help them make unbiased and informed decisions.

Similarly, the use of Blockchain can also help verify buyers' credit and allow developers to make secure purchasing decisions. This could democratize real estate investments and provide additional levels of security.

However, despite so much inherent strength, and disagreeing slightly on what Dr. Pennington proposed in his presentation, reinventing a world in which real estate transactions are carried out through digital currencies such as bitcoin or ethereum is still implausible, even more so having the story of the recent collapse of these currencies.

But ... has the time really come to bet on cryptocurrency in Real Estate?

Although we are in the midst of cryptocurrency hype, some of the inherent weaknesses of digital currencies cannot be overlooked. Let's now turn to analyze those "buts":

Digital currencies do not create any cash flow and their appreciation is mainly subject to speculative forces. They are also prone to hacking attacks and online frauds. Cryptocurrency enthusiasts praise the absence of banks and central authorities, although the lack of regulatory bodies could be dangerous at times and can be a propitious terrain for fraud.

But, as I indicated earlier, in times of economic turbulence, a sensible move is to acquire assets instead of cash, and the digital world and all the innovation it offers us can help do so in the most optimized and beneficial way possible. The use of a digital asset to access new routes of tangible value is innovation at its best... Although an innovation that is debated between present and future.

"So, what is your conclusion, David, to this reflection?" I know that I will have a minimum margin of error if I risk venturing that that phrase is the one that is hanging around your head reached the final part of this article. And, to be totally honest, is that while Blockchain-based technologies will see a greater participation in the commercial cycle of Real Estate, we are not currently detecting a wide use of cryptocurrencies in real estate transactions. However, despite these inherent challenges, its limited application in alternative assets, such as rental homes, second homes, holiday accommodations, etc., will continue to increase progressively over the next few years. And so, a second reflection will be necessary.

David Granell Moreno

CEO