TLDR: Before the crypto market started losing value this Spring, some crypto homebuyers started offering crypto to sellers. Why did the momentum falter and will crypto re-enter the Realtor lexicon?
When the crypto market reached new heights in November 2021, it captured headlines, and crypto enthusiasm spilled into real estate. Some homebuyers who had made money investing in crypto considered using this new currency to purchase a home. Others preferred to borrow money to purchase a home by using their crypto as collateral. This allowed them to hold onto what had been an appreciating asset and avoid paying capital gains.
Crypto infiltration into housing slowed in 2022 as inflation rose and investors began to move their money away from risky investments. They sold stocks and cryptocurrencies, causing prices to fall.
In May, the crypto markets saw several large crypto companies fail, setting off a chain reaction. I will discuss the series of failures, assess where the crypto market stands today, and talk about how real estate agents can make sense of the relationship between crypto and real estate.
Stablecoin TerraUSD was the first domino to fall
Cryptocurrency volatility presents uncertainty in real estate transactions. For example, if an agent listed a house for $1 million and a buyer offered to pay 50 bitcoin and close in 30 days, neither the buyer nor the seller would know what the US dollar price would be at closing.
If bitcoin was $20,000 at the time of the offer but then increased to $25,000 at closing, the seller would have received $1.25 million instead of the negotiated price of $1 million. Great news for the seller, but not for the buyer. Conversely, if BTC dropped in price, the buyer would benefit.
Stablecoins were created to address this problem. Stablecoins are a type of cryptocurrency whose price is tied to a stable government-issued currency. They provide predictable pricing in the volatile cryptocurrency world.
There are two broad categories of stablecoins. One category, such as Tether coins, is backed by assets such as cash, short-term US government securities and commercial paper. Another type is not backed by assets. Instead, it is backed by a second coin, and the stability is determined by an algorithm. These are “algorithmic stablecoins.”
TerraUSD was an algorithmic stablecoin, and its collapse precipitated the contagion that brought down several crypto companies.
Terra is tied to the US dollar, and whenever its value slipped and fell below $1, some of the Terra was removed from the market (“burned”) and replaced by $1 worth of the company’s sister coin, Luna. Terra holders could exchange Terra for Luna.
The algorithm worked well, and the market cap reached $41 billion in April. But then the platform was challenged when several large withdrawals occurred. This caused instability, and customers lost confidence. The price drop started to accelerate and then went into a tailspin.
The CEO of the largest crypto exchange Binance, CZ, explained, “The design flaw: minting coins (printing money) does not create value, it just dilutes the existing coin holders.” When the dust settled, $50 billion disappeared.
Crypto lenders and a crypto hedge fund file for bankruptcy
Cryptocurrency and blockchain were created in response to the bank failures in 2008. The vision was to create a platform on the internet where participants could engage in financial transactions independent of the banking system. The participants could use cryptocurrency to pay for goods and services, borrow money and lend money.
The creators believed that excluding the banks and regulators would facilitate quicker transactions, lower fees and higher yields on loans. In traditional finance, there are:
- Investors seeking to earn fees and interest by lending money.
- Borrowers seeking a loan who want to pay minimal fees and interest.
- Merchants looking to pay minimal fees for the privilege of using a credit card network.
Crypto lenders provide these services. They entice customers to deposit cryptocurrencies by offering attractive interest rates that far exceed traditional banks. The lenders then use the crypto deposits as loans. The system worked well as crypto values increased. However, when crypto prices dropped, lenders who were too focused on growth and not enough on risk were vulnerable.
Crypto lenders Celsius Network, LLC and Voyager Digital Ltd. enter Chapter 11 bankruptcy
Celsius brought in crypto by offering 18 percent interest to customers who deposited their crypto into a Celsius account. Other Celsius customers who wanted to borrow money (US dollars or other crypto) could use their crypto as collateral to receive a low-interest loan. Often, borrowers received their funds within hours of submitting their applications.
Celsius invested customer funds in risky loans, and when cryptocurrencies started to fall in value, customers got nervous, and many withdrew their funds. This created a “run on the bank,” and on June 12, 2022, Celsius froze all customer accounts. According to its bankruptcy filing, Celsius owes its customers $4.7 billion.
Voyager offered its customers brokerage, custodial, and lending services. At its peak, Voyager had $5.9 billion in assets, and 97 percent of its customers had less than $10,000 on the platform.
Their business suffered as crypto prices fell, but the death knell was a $650 million loan that Voyager provided to another bleeding crypto company – crypto hedge fund Three Arrows Capital. Three Arrows filed for bankruptcy on July 15, 2022.
Crypto lending was born when crypto businesses saw the opportunity to grow by promising very high-interest rates. Customers flocked to the lenders. Prospective customers read rave reviews online and felt confident that the lenders were reliable. The lenders were able to pay out high-interest rates when the market was strong.
When the price of crypto fell, customers who had not read or understood the agreements they had signed discovered that the unregulated crypto lenders didn’t protect or insure customer funds. The customers had provided an unsecured loan.
Not all large crypto companies failed. The crypto companies that understand and manage risk are still standing. Others have either shut down, are in bankruptcy, or seeking help from thriving crypto companies.
Legislators on Capitol Hill and regulators at the Securities & Exchange Commission (SEC), Commodity Future Trade Commission (CFTC), and other departments and agencies are working on a regulatory framework to protect investors.
When policymakers determine how to protect investors while supporting the crypto industry, clear regulations will pave the way for crypto in real estate. Savvy real estate agents conversant with crypto will be ready to work with these customers.
Rich Hopen is an agent in the CØMPASS Short Hills, NJ office. He writes a weekly newsletter Crypto News for Realtors, creates crypto videos on YouTube, and is on LinkedIn.