Bitcoin commanded a larger than usual share of the business headlines this week. The volatile cryptocurrency's value hit an all-time high of $4,483.55 on Tuesday. Its value has risen 600 percent year-on-year, according to CoinDesk, a media outlet which tracks the cryptocurrency world.
Bitcoin's meteoric jump in value, and cryptocurrencies' ascendance more broadly, has crept into more of PERE 's conversations of late. As such, we took it upon ourselves to analyze the extent to which it is playing a part in private real estate investment right now.
This analysis has led us to the initial finding that the currency itself is not being used, or even sought, for transactional purposes – yet. However, there is growing momentum in the application of cryptocurrency's underlying technology, blockchain, for other facets of the market.
In these early days, real estate applications for blockchain center largely around its immutability as a transparent database system, and the ease with which it allows the transfer of information and assets. Pilot programs have proven effective for small-scale title transfers, for example. In one instance, Rotterdam's city government executed such a program in a joint venture with global consultancy Deloitte. In another, Chicago's Cook County Recorder of Deeds partnered with blockchain startup velox.RE to test a peer-to-peer deed transfer that could be recorded on a government's traditional ledger.
In certain developing countries, where organizations might struggle with government and business corruption, title transfers via blockchain theoretically offer a more secure alternative to storing records that could potentially be duplicated or edited if simply stored in a government office. More generally, eliminating the need to work through government offices at all should speed up administrative processes, eliminate human error and lead to more transparent trails.
Other areas of benefit include transactions involving escrow accounts. For these, a smart contract could include agreed-upon obligations. When these are fulfilled, transacting parties digitally sign off, potentially along with their lawyers, any relevant government agencies and other parties, and money is then transferred automatically without the need for an escrow company or other intermediary.
Of course, these benefits are equally relevant to other asset classes too.
As far as private real estate is concerned, high-net-worth investors and family offices are leading the charge when it comes to this technology. That stands to reason given these investor types typically enjoy greater latitude and less oversight than say, public pension plans, when it comes to embracing new practices. Nevertheless, PERE has learned of at least two managers of institutional capital engaged in 'late-stage discussions' with tech start-ups about integrating blockchain into various areas of their businesses – although not transferring money, at this stage.
Adopting blockchain for administrative matters in the first instance, and not financial transactions, is an understandable first step. In our analysis, one source rightly likens today's environment to the final years of the last millennium, when unabated investment in online start-ups led to volatility and ultimately the dotcom crash. Bitcoin's price swings suggest a similar volatility. They have led Oaktree Capital Management's founder Howard Marks to exclaim “But they're not real!!!!!” in his latest white paper late last month.
The private real estate market has yet to take a position on Bitcoin's existential issue. But the early indicators are that it is taking an affirmative position on the currency's underlying blockchain technology.