Bitcoin for a house? CT experts say to proceed with caution

The Westport home is not the first one listed in Connecticut where the owners are accepting digital currency. Further south on I-95, a Greenwich compound listed for $6.5 million hit the market in April and accepted cryptocurrency as a form of payment. They’re two of several homes across the country to be listed this way. 

While no homes have been recorded as being purchased with Bitcoin in Connecticut yet, one in Miami was purchased in June 2021 for $22.5 million using cryptocurrency (and became the most expensive home ever to be purchased with digital currency at the time). 

The use of digital currency is still new territory for real estate agents like Carrie Perkins of Re/Max Heritage’s Spaces CT team, who is a co-listing agent on the Bluewater Hill home.

It’s been a learning curve for Perkins and her brokerage, she said.

“Before we did anything, I went through my brokerage and said, ‘[The sellers] want to do it, I want to do it, can we do it?’” she said.

“Title insurance is based on dollars,” she said. “So we needed to make sure you could get a title policy on the house. And yes, in fact you can…It’s just making sure that your attorney has done the necessary due diligence on your end.”

‘Taking a huge risk’

Unlike dollars, euros and other traditional currencies, cryptocurrencies are not backed by governments, central banks or, for the most part, physical assets, according to the Associated Press. As a result, their value is often determined largely via supply and demand, which can cause wild swings in their value.

And in recent days, cryptocurrency’s value has been dropping. In the latest high-profile collapse of a pillar of the cryptocurrency industry, the price of bitcoin and other cryptocurrencies plummeted Monday after a major cryptocurrency lender effectively failed and halted all withdrawals from its platform, the AP reported. 

Ethereum, another widely followed cryptocurrency, was down roughly 17%.  

A potential contract for a transaction using cryptocurrency would need to “make sure that whatever the agreed-upon amount [of cryptocurrency] is equal to the dollar value on the day of closing” because of how much the digital currency can fluctuate, Perkins said.

That rapid fluctuation makes using cryptocurrency to purchase the home a complicated transaction at best, said Michael Kelly, a financial planner at Switchback Financial in Madison.

“There’s no price stability,” Kelly said. “The volatility around crypto is so massively high. That’s why I don’t believe in it as a currency at all — there’s no stability. You’re taking a huge risk that it could be worth a lot more, or a lot less.”

Despite its volatility, Perkins said she has come to see crypocurrency as an acceptable means of completing a purchase. 

“It is a standard, accepted form like any other trade  —  and it is referred to in the industry as a trade,” she said. 

Perkins said two types of cryptocurrency — Bitcoin and ethereum — are as the “gold standard” in real estate so far.

They “seem to be the most stable and widely-referred-to in terms of real estate transactions,” she said.

How would it work?

A successful cryptocurrency real estate transaction would require a seller well-versed in cryptocurrency, along with an attorney who researched cryptocurrency’s use in real estate, Perkins said. 

“We would do a cash contract deposit, otherwise you wouldn’t have any earnest money,” she said, noting that it would held the traditional way in an attorney’s escrow account. “The cryptocurrency would be spelled out, I would assume, in painstaking detail in the contract to say that whatever the type of currency is, this is how the transaction will happen and the value of the on the day of closing will be equal to X dollars.”

If the Bluewater Hill property were to sell to a cryptocurrency buyer for $12 million, for example, the digital currency would have to be equal to that dollar value, Perkins explained. It would be up to the seller to decide whether or not to convert the digital currency into dollars right away.

According to Vincent Averaimo, partner at Barton Gilman Law in Milford, the reason to convert cryptocurrency to traditional dollars has everything to do with its volatile nature. 

“Let’s say you close at 4:30 p.m. on a Friday, which is not unreasonable in any sort of real estate transaction,” he said. “Then Monday morning when the market opens, Bitcoin plummets. You basically got nothing. Or significantly less than you wanted.”

For Perkins, a prospective buyer’s use of cryptocurrency would be like cashing in a volatile asset — digital currency — in favor of a stable, tangible asset —a home.

“That’s people’s motivation for doing it — they’re crypto rich,” she said. “They’re flush with that kind of currency, so why not put it in one of the most traditionally stable assets?”

The volatility that comes with the currency is just one of the reasons why Averaimo said any buyer considering making a purchase with cryptocurrency should have a team of experts guiding them through the process.

“If you’re doing a real estate transaction with cryptocurrency, your CPA better well know how the Internal Revenue Service is going to view the transaction for tax purposes,” he said.

‘Gas fees’

Taxes, fees and other transactional elements further complicate matters, Kelly said, adding that he only provides guidance on major digital currencies and doesn’t personally manage cryptocurrency portfolios.

For starters, there are fees associated with validating cryptocurrency transactions, he said. According to the AP, blockchains, the digital ledgers where cryptocurrency transactions are recorded, are constructed by people known as ‘miners’ who lend their computing power to verify cryptocurrency transactions so that no one can spend the same token twice.

“When they’re mining bitcoin, they’re validating all the transactions, and they take a cut of that and that’s called a ‘gas fee,’” he said. “And gas fees are very expensive.”

The cost of gas fees changes based on how many computers are “mining” cryptocurrency, or digitally tracking cryptocurrency transactions. To understand these validation fees better, Kelly said he purchased an NFT — a non-fungible token, or an artificially scarce digital object created using blockchain technology to mint “unique” versions of digital artwork or other items.

To purchase a $100 NFT, Kelly said he paid a $50 transaction fee.

When the crytpocurrency Terra imploded in early May, erasing tens of billions of dollars in a matter of hours, it spurred calls for reform from the cryptocurrency industry, and calls for Congressional regulation, the AP reported. 

The potential for future regulation of cryptocurrency markets could make things even trickier for real estate agents, said Averaimo.

“Many times, they will not realize the consequences that may come with regulation that may make things more difficult,” he said. “Obviously, it’s important to have the proper team members associated with a transaction that’s very well versed in the process. Does that mean there has to be a special license? Does that mean there has to be some sort of special certification that maybe protects the consumer?”

While cryptocurrency could allow for faster real estate transactions or allow sellers to offer a discount for a buyer using Bitcoin, he said, the real estate closing process is already “pretty well organized.”

And even if a buyer wanted to purchase a home using digital currency to maintain some sense of anonymity, Kelly noted that once a real estate title is filed, “you’re not keeping things anonymous in that sense.” 

Why use cryptocurrency?

Cryptocurrency may soon be a more readily available form of currency for younger buyers, Perkins said. 

“Maybe they’re young, and they come up and they’re crypto millionaires,” she said. “It’s an easier ‘yes’…It’s like funny money, so maybe there’s a little less stress.”

Others who are heavily invested in the digital currency might rather hang onto it, in the hopes that it grows rather than pay for a home in a more traditional way, she said.

Kelly, said he doesn’t see many upsides to using cryptocurrency at all, outside of its inclusion in an investment portfolio.

“To be honest, there aren’t too many pros in my view,” he said. “There’s an aspect to it that maybe opens up slightly to people who may not have liquidity because they’re sitting on Bitcoin, and that opens the door.”

The “peer-to-peer” nature of cryptocurrency, and its quasi-anonymous nature, might appeal to some to use the currency to purchase a home, Kelly said, but otherwise, he feels it might hinder a home offer. 

“Unless the home is specifically accepting Bitcoin, trying to go into that void [to find a house that accepts it] is just limiting your house search,” he said. 

What’s the future of crypto in real estate?

Perkins said she and her colleagues in real estate are still learning about cryptocurrency’s role in real estate. A colleague sent her a link to an article recently about a sale in Florida that was voided because it used a type of cryptocurrency that required validation through a third party, she said. 

“In the world of real estate, you can’t have a third party getting compensation in that way through the transaction,” she said.

Averaimo said he expects the fast-changing cryptocurrency market to lead to specialization.

“I think it’s going to create a kind of pocket specialty within the legal community and the title community, with people who have extensive experience in the cryptocurrency process,” he said. “I think it has to.”

“People should be aware that it’s here,” Averaimo said. “It’s probably going to increase and to that end, people should take it seriously because there is consumer risk involved.”