27th Aug, 2014 Technology

Will BitCoin Disrupt the Real Estate Market?

Ask your landlord, bank or real estate agent if they accept BitCoin and you will most probably be met with a bemused frown.

BitCoin is a global, decentralised, peer-to-peer payment system using open source software. In layman’s terms, BitCoin is a virtual currency, which can be used to purchase goods and services over the Internet. According to Bitpremier, a BitCoin online marketplace, you can purchase a one bedroom apartment off the plan in the Abacus development in Abbotsford, Canada for 308 BitCoins. You can also acquire one third of an island somewhere in Indonesia for 19,904 BitCoins. If commodities tickle your fancy, why not buy a “proven profitable gold mine” in Dawson City, Canada for a cool 3,961 BitCoins.

Accepting Bitcoin for property purchases only a year ago would have been unheard of but as the digital currency continues to gain momentum, will it disrupt the real estate market?

BitCoin was released to the public in 2009 and many early adopters treated the digital currency as an alternative asset class, much like investing in commodities. Since BitCoin’s inception, its value has skyrocketed from $US1 to over $US1,100 and has subsequently retreated from its dizzy heights, settling at $US507. Early adopters have enjoyed massive capital gains and, unsurprisingly, many have opted to transfer their BitCoin gains into the more stable real estate space.

Realty Share, founded by Nav Athwal, is one of the first real estate investment platforms to accept BitCoin and to realise the potential purchasing power of these early adopters. The firm, which operates a crowd funding platform, connects property owners with prospective BitCoin investors and allows investments for as little as $5,000 or about 9.86 BitCoins.

With the assistance of platforms like Realty Share, Bitcoin has opened up real estate investment to a wider class of investors and therefore has the potential to drive up asset prices. However, as Mr Athwal explains, “the impact of BitCoin will always be limited to the number of existing real estate players that are willing to accept the new technology.” Real Estate is, unfortunately, a traditional asset class and many of the existing players remain reluctant to change their “business as usual” attitude. Trident Real Estate Capital believes that over time, as institutions begin to invest and create products using BitCoin, real estate players will be compelled to open up their platforms to accept the digital wealth.

Is BitCoin causing disruptive ripples by rivalling prime real estate as an alternative investment class? BitCoin’s value has been the subject of intense media coverage and volatility during its relatively brief history. In February 2014, the collapse of the most prominent BitCoin exchange, Tokyo-based Mt. Gox, caused major ripples, impacting the respectability of the digital currency. Those investors that have been prepared to ride the troughs and peaks of BitCoin have been, predominately, market mavens and early adopters. These individuals are brokers with entrepreneurial networks who understand the value of new innovations and the large value gain arising from BitCoin’s volatility. On the other hand, prime real estate has enjoyed a wave of investment from institutions and global ultra high net worth individuals all seeking a safe place to store their wealth. In light of the stark difference in risk appetite between BitCoin holders and prime real estate investors, it is unlikely that BitCoin is driving business away from prime real estate. An overlap, however, may be more pronounced in the more risk loving pool of investors who are seeking value-add opportunities and higher yields in the secondary and tertiary real estate markets. In this riskier space, BitCoin may be seen by investors as a competitive alternative.

Trident Real Estate Capital believes that as BitCoin evolves, it will shift from being perceived as an alternative asset class to being considered as a safe, easy to use and secure currency. Mass high street consumer adoption will mean that the value of BitCoin as an asset class will significantly decline. On the other hand, the value of BitCoin as a currency will become more prominent, as consumers fully appreciate its advantages over fiat currencies including geographic freedom, insulation from government interference and nil transaction costs.

Before BitCoin can be widely accepted by merchants and investors alike, the digital currency’s regulation must be settled. Regulation will increase security as well as legal certainty and is seen by many BitCoin users as a necessary evil. Unfortunately, the digital currency is currently in limbo, with many regulators treating it as a political football. The Chairwoman of the Federal Reserve, Janet Yellen, recently explained that the Fed could not regulate BitCoin as it was not a US currency. Earlier this year, the Reserve Bank of Australia issued a comprehensive report about the risks of investing in BitCoin noting that, “the potential anonymity of BitCoin users and the irrevocability of transactions…limits investors’ avenues for recourse against fraudulent merchants.” Most recently the Australian Taxation Office classified Bitcoin as a capital gains tax asset for income tax purposes (see TD 2014/D12).

Investors must realise that policy is dictated by behavior. The Internal Revenue Service (IRS) in March 2014 audited the BitCoin industry and found that a majority of users were investing in BitCoin as an asset instead of a currency. Unsurprisingly, the IRS announced that it would treat transactions using BitCoin as a transfer of property attracting capital gains. Trident Real Estate Capital believes that as BitCoin becomes more mainstream and consumers adopt it as their currency of choice, regulation will respond to ensure the buyside community is protected and confidence in e-commerce is maintained.

BitCoin will reshape global commerce. We believe that BitCoin will open up real estate investment to a wider class of investors, allowing property transactions to be completed more securely and rapidly, with lower transaction costs and without a need for a central bank. To quote Bill Gates, “BitCoin is a techno tour de force.”