We’ve made several advancements with the continuous evolution of technology, especially in payment processing. We’ve seen the development from cash to card, physical to digital payments, and desktop to mobile transactions. That said, cryptocurrency has made a significant impact on the financial industry. But, what does that mean for real estate investors? Keep reading to learn about cryptocurrency, the differences between investing in cryptocurrency vs. real estate, and how blockchain can help property management.
What is Cryptocurrency?
Before we dive into cryptocurrency vs. real estate and how it can impact investors, it’s important to understand what it is. Simply put, cryptocurrency is a virtual-based currency that you can use to purchase goods and services safely. Moreover, it’s maintained by cryptography rather than a centralized authority, making it secure and nearly impossible to counterfeit.
Cryptocurrency only exists virtually, without physical paper, coins, or cards. Additionally, unlike traditional forms of currency, most cryptocurrencies are built on decentralized networks based on blockchain technology. These decentralized peer-to-peer networks allow people to send transactions directly from one person to another without any regulation from a central authority.
How Does It Work?
Cryptography, which is a method of securing important information, enables secure payments without the involvement of third parties. Then, the transaction is stored in a blockchain, which we’ll explain more later on.
You can either mine or purchase cryptos from a cryptocurrency exchange, like Coinbase. That said, there are several different cryptocurrencies. For example, most people have heard of Bitcoin and possibly Ethereum and Litecoin.
Why Does Cryptocurrency Exist?
Cryptocurrency exists because trust has always been an issue regarding money and the monetary value of items. As a solution to the problem long ago, the government and banks worked together to create a way to make, value, and record currency.
However, relying on centralized financial institutions isn’t necessarily ideal. For example, switching between currencies can be challenging and costly while traveling internationally. Additionally, you don’t fully have control of your money–your bank does. As a result, cryptocurrency aims to solve trust and privacy issues regarding transactions and payments.
To further understand cryptocurrency, let’s talk about blockchains and how they work.
What is Blockchain?
A blockchain is essentially a database that records transactions made in cryptocurrencies, shared across the nodes of a computer network. Blockchains maintain a secure, decentralized record of transactions. Ultimately, the goal of a blockchain is to record and distribute information in a way that cannot be edited. Blockchain is distributed ledger technology (DLT), meaning it’s impossible to alter, edit, or delete records of transactions.
Blockchain differs from other databases because it stores information in blocks linked together by cryptography. As new information comes in, it creates a new block. Once the block is filled with data, it’s added to the chain. You can store several different types of information on a blockchain. However, it’s most commonly used for transactions.
All in all, blockchain is used in decentralized ways so that there isn’t one person or group in control. Instead, all blockchain users collectively maintain control. Finally, data entered in blockchains are permanent and can be viewed by anyone. So, keep that in mind if you’re looking to purchase crypto like Bitcoin.
We’ve gone over a lot of technical information–a brief introduction to cryptocurrency, blockchain, etc. But if you’re wondering about the pros and cons of cryptocurrency vs. real estate and how it can impact investors, we’ll go over that next.
How Can Cryptocurrency and Blockchain Impact Investors?
Cryptocurrency and blockchain have and will continue to significantly impact several industries, including real estate. For example, cryptocurrency can play a huge role in streamlining processes for investing and managing rental properties. If you’re wondering how, here are some of the impacts of cryptocurrency on investors.
- Cheaper and Faster Transactions
- Verified and Transparent Information
- Investments Anytime, Anywhere
- Benefits Through Tokenization
Cheaper and Faster Transactions
Purchasing real estate can take days, weeks, or even months. However, crypto and blockchain increase the efficiency and speed of transactions. For example, transferring a Bitcoin from one virtual wallet to another can take 10 minutes. In addition, once the transfer is successful, the funds are verified by the network, so they are guaranteed.
Aside from the efficiency of transferring cryptos compared to the loan process with a bank, it eliminates the fees associated with those services. Rental investors know that these fees can add up over time, so the savings can be quite significant.
Verified and Transparent Information
Blockchain keeps information private, verified, and transparent, which has been a known issue for real estate in the past. Additionally, this technology allows investors to facilitate digital transactions using a peer-to-peer network instead of relying on a trusted party.
According to Forbes, “blockchain can make MLS property data more centralized and accessible, title records easier to track and transfer, and make transactions more efficient and secure.”
Investments Anytime, Anywhere
You can use cryptocurrencies anywhere globally, as long as their respective government doesn’t prohibit it. On the other hand, you have to convert US dollars to other currencies when you travel internationally. Cryptos can be a significant advantage for foreign investors who take on inconvenient exchange rates or regulations.
One example includes China and their oversea investment bans. A large percentage of foreign investors in US commercial real estate are Chinese investors. That said, the bans have had a significant impact on investors’ profits. So, Chinese investors have switched to using cryptocurrencies to continue purchasing real estate in the US, since the Chinese government cannot regulate these transactions.
Benefits Through Tokenization
Another advantage of blockchain is real estate tokenization, which Alphapoint defines as the process of creating a digital asset that represents a single property or portfolio of properties on a blockchain-based system”. So essentially, property owners can split their assets into tokens, which allows for partial ownership of properties.
That said, investors can buy as many tokens as they want. Additionally, you don’t need to purchase real estate immediately, all at once, using tokens makes it more affordable for users to gain equity and diversify investments. Tokenization also makes liquidity easier since you can resell tokens through secondary training.
How Can Blockchain Help Property Management?
Cryptocurrency and blockchain technology can severely impact investors and the real estate industry as a whole. But, how does that affect property management? Although blockchain is less developed in this area, there are two significant areas with innovation potential.
Smart contracts, enabled by blockchain allow investors to enforce agreements between multiple parties digitally. These contracts work in a particular way, which requires one party to meet a pre-determined condition before the resulting action. For example, if you pay your security deposit, you’ll get keys to the property.
That said, a tenant must meet the condition before completing the following action. For example, a landlord agrees to give a tenant the keys after paying a security deposit and the first month’s rent. However, once a tenant pays, the landlord cannot do anything to prevent the transfer of keys to the tenant. Additionally, smart contracts are public information so that neither party can accuse the other of non-payment or wrongdoing.
Since all information regarding the property is linked together on the blockchain, smart contracts can also be linked to rent payments. Furthermore, you can set them up to automatically deduct the rent payment from the tenant’s account every month. It keeps renters liable and reduces the chance of late payments.
Rent Collection With Cryptocurrency
Rent payments with cryptocurrency are a considerable innovation opportunity for real estate. Although it’s not very common yet, and most property managers don’t accept cryptos as payment, it’s slowly evolving. Unfortunately, one thing holding back investors and property managers from using cryptocurrencies is a lack of confidence and history in this new technology.
Cryptocurrency vs. Real Estate: Which Is a Better Investment?
There are several ways rental investors can benefit from using cryptocurrencies to purchase real estate. But what about just investing in cryptos instead? Here are some of the benefits and disadvantages of cryptocurrency vs. real estate.
Benefits of Cryptocurrency
- Low-entry barrier– You don’t need to take out a loan or spend hundreds of thousands to buy cryptocurrency compared to purchasing real estate.
- A quick increase in value– Cryptocurrency can increase in value quickly, especially with more and more investors becoming interested.
- Security and relative stability– With more stable cryptocurrencies, like Bitcoin, it’s more reliable and secure.
Disadvantages of Cryptocurrency
- High volatility– Typically, volatile assets don’t make for suitable investments. In just minutes, cryptos can drastically rise and fall in value.
- Government regulations– Since they’re sort of a challenge to traditional currencies, some governments may restrict or ban cryptocurrency transactions in their money.
- Security concerns– There’s undeniably a higher chance of taking losses through hackers, glitches, and malfunctions when dealing with digital assets like cryptocurrency.
Benefits of Real Estate
- Continuous cash flow– Rentals provide a steady income for their owners, with tenants paying rent each month.
- Tax benefits– Several tax benefits are available for real estate investors, allowing for write-offs and deductions.
- Increase in value– Most real estate is bound to increase market value over time, making it a relatively safe investment.
Disadvantages of Real Estate
- High-entry barrier– Not everyone can afford to buy rental properties. It requires a large down payment which can mean heavy debt for some investors.
- Maintenance– Rental property maintenance can take up a lot of time and money for investors. Luckily, property management in Philadelphia has professionals to help maximize rental investments.
Maximize Your Rental Portfolio With Property Management
When it comes to whether you should invest in cryptocurrency vs. real estate, it’s up to investor preferences. However, there are several benefits to both, including using cryptocurrencies for real estate investors and property managers.
If you’re looking to expand your rental portfolio, look to Bay Property Management Group for management services. Contact us today if you need rental management services in Baltimore, Philadelphia, Northern Virginia, or Washington DC.