On Bitcoin And Property Prices: Nowhere Near Ready For Prime Time

The bitcoin logo

The new international digital currency Bitcoin has found itself in the news quite a bit over the past couple of years. The novelty of Bitcoin’s story is attractive — a currency not beholden to any central bank nor any state is something that causes imaginations to run, and makes us review the relationships between the deals we make and the stuff we use to transfer value in those deals. Dollars are, after all, only one (supremely popular) means of facilitating payment.

Beyond that rich area for thought lies the fact that Bitcoin’s value in dollars has, in the long term, climbed sharply. Some see a speculative bubble destined to messily pop, some see the early days of a permanent and true digital currency.  Many lie somewhere in the middle while a whole lot of folks are left wondering what the heck Bitcoin is.

What is Bitcoin?

I don’t want to make anyone’s eyes glaze over, but the fact is, explaining Bitcoin properly requires a lot of computer-nerd vocabulary and experience. As readers of The Source already know, I have a some depth in technology topics.  The question is: can I explain Bitcoin without drowning anybody in jargon?  Let’s try:

The simplest and most useful way to put it is like this: Bitcoin is a “secure” way to carry value on your computer or pad or phone.  You convert dollars to Bitcoins (BTC) using an Bitcoin exchange and you carry around and spend Bitcoins in the same way you carry around files on your computer or send messages such as e-mail or text.

That’s it, for now anyway.  The hows, wheres and whens are all nerd stuff and I’ll be glad to answer any questions in comments.  But for now: Bitcoins are magic pieces of digital information that carry value measured in dollars. Or Euros.  Or Yen, etc.

“Secure” Doesn’t Mean “Stable”

While Bitcoin is by design secure, meaning the amount of BTC you have and spend is protected against a wide variety of theft, (theft from your machine, theft in transit, theft during transaction) Bitcoin is not by any means stable.  By that, I mean the predictability of the dollar value of BTC is a very different beast than the dollar value of, say, the Euro or the Yen, just to take a couple of examples.

The rate at which dollars are traded for BTC is determined by markets, the oldest and most famous of which is based in Japan, called Mt. Gox.

A quick look at the charts of trading in BTC will show what I mean by avoiding calling BTC “stable”.  Unlike traditional currency markets, BTC can see radical loss in value in just one trading day.   These crashes are eye-popping, the latest having lost nearly 50% of the “currency”‘s value.

The most recent crash was spurred by an announcement that the biggest Bitcoin startup in China, called BTC China, would no longer accept deposits in Chinese currency (the yuan).

In other words, Bitcoin is money that could be worth half what it was yesterday around the world if one country decides to enforce capital controls.

Property Transactions Using Bitcoin: Seller And Buyer Beware

From where I”m sitting, using a crash-prone currency to conduct real estate business seems to be risky, risky stuff.  Yet, all that observation does is prove that my appetite for risk is always going to be less than somebody else’s.

Today, that somebody else is a home seller in Southampton, NY who says he will accept the $799,000 sale price in Bitcoin

Cash-strapped buyers eyeing a particular four-bedroom home in Southampton need not fear: the seller will also accept Bitcoin for the $799,000 asking price.

That may be a tricky price to nail down however, as the digital currency’s value has been all over the place in the past 12 months. Philipp Preuss, who is selling the home, told the Wall Street Journal that with this transaction, the Bitcoin price will be determined by the average exchange rate on the day the sale closes.

He would also accept a combination of Bitcoin and cash, he told the Journal.

“There might be international buyers, or a younger computer whiz who came into a little bit of coin overnight,” Preuss told the Journal. By opening up the sale to accept the digital currency, he said he is “expanding my buyer base.”

Preuss said he had to give his broker, Amadeus Ehrhardt of Brown Harris Stevens, a crash course in the currency.

“Aside from what I hear on the news about it here and there, I didn’t know much about Bitcoin,” Ehrhardt told the Journal. “But people are always interested to see what’s new and people like options.”

Prime Time: Not Yet

Obviously it’s early in the history of Bitcoin and in digital currencies more generally.  But I feel safe saying that the financialization and stability requirements of commercial real estate transactions — transactions that rope together so many skill sets and variables as it is — mean this industry isn’t likely to embrace Bitcoin with the same enthusiasm that other business sectors might.  A currency that sheds half its value overnight just doesn’t make the grade.

 

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18. December 2013 by Wayne Grohl
Categories: Tech Tutorial | Tags: , , , , , | 6 comments

Comments (6)

  1. The keyword you should use is “yet”.
    The degree of volatility should reduce significantly as the cryptocurrency gains more acceptance and transactions flow more regularly. For now, Bitcoin is taking toddler steps and has some years to age. Will it be viable for large-scale deals such as Real Estate? I think so.
    Consider BitPay.. It exists to allow businesses to reduce volatility by converting Bitcoin transactions to appropriate fiat currency as an exchange, but in short order. It may require a larger entity of this sort to damper volatility concerns in Real Estate, yet some clients already have a Bitcoin relationship. For this reason, I strongly suggest Realtors to keep an open mind, not only to Bitcoin, but to other emerging cryptocurrencies. Furthermore, those who do will have advantages with Clients who dictate demands. Market trends change in this business, and the Genie has been let out of the bottle. One thing to bear in mind is the strongly-coded limit of bitcoin numbers. Presently, about 12.3 million BTC has been mined, with a coded limit of 21 million. This could result in deflationary circumstances not usually experienced in measured trends. On that point, I agree, yet other emerging cryptocurrencies are coded differently in many aspects where the degree of volatility may not be as severe. Time will tell as this technology remains very young with many painful lessons having been realized.
    Disagree if you must, but I suggest Bitcoin is here to stay.

    • Hey Harry,

      I agree that Bitcoin and digital currencies are early in their histories and shouldn’t be written off due to the properties on display currently. It’s just too soon to say with any authority if volatility risk will calm down to levels currencies traded on FOREX markets currently enjoy. If they do, then transactions of all kinds are in the cards.

      Thanks for the tip on BitPay and the thoughts about property markets.

      WG

  2. If the entire transaction is in bitcoin, how are the taxes, fees and sales commission calculated and paid?

    • Q: “If the entire transaction is in bitcoin, how are the taxes, fees and sales commission calculated and paid?”

      I have no specific idea there, except to say that such arrangements paid in dollars today are predicated on agreements, e.g. contracts between parties (in the case of commissions or fees) and upon the wider agreement between the government and the governed in the case of taxes. Conducting transactions as we understand transactions in commercial real estate entirely in a digital currency would require similar agreements between parties at the minimum. What form would these take, how could they be enforced, etc is an evolving situation. Surely, we are aware that imperfections exist in the collection of taxes irrespective of Bitcoin or digital currencies — the news is filled with corporate pipelining of record profits to tax havens — and we can guess that such imperfections will persist no matter what currency medium gains popularity.

      Thanks for the comment!

      WG

  3. This Bitcoin craze is just the latest fact that we need to rethink the value of currency.

    If it were to ever take off and be used more than the dollar, it would be investigated, scrutinized, and broken up to avoid devaluing the dollar.

    I look forward to monitoring this new phenomenon and investing in it as well.

  4. Bitcoin is 3 years old. Were you stable or mature at that age?

    What bitcoin needs is representation in politics.

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