Before we can understand how blockchain and cryptocurrency will affect the UK property market we need to understand a little bit more about each topic and how they work together.
What is blockchain?
According to the Harvard Business Review, blockchain is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”. What this means is that it is a secure place for two parties to perform transactions and store these transactions. Anyone can hold a copy of the ledger and read it, however, confidential information is secured with a private key.
How does blockchain work?
Blockchain is an incorruptible digital ledger that records transactions. This technology has become increasingly popular with rise of cryptocurrency. Blockchain approves and records all transactions on an open and transparent ledger. In order for a transaction to be approved, the network needs to reach a consensus. This could take anything from a few minutes to a few hours. Once a consensus is reached, the transaction takes place and is recorded on the ledger.
Blockchain and cryptocurrency are completely separate from each other, however, cryptocurrency uses the blockchain platform. However, this platform can be used to store almost anything. For example, banking transactions, social media, medical records, property titles registries and much more.
What are the advantages of using blockchain?
Blockchain helps increase confidence and transparency. Individuals traditioanlly ahve relied on trusting each other, as well as insitutions such as banks and govenrments. Blockchain is indepednant of these insittuions, and hence is not subject to manipulation. When transactions are recorded on the blockchain, they are made public for people to verify.
How will blockchain influence property?
The UK is exploring blockchain technology for property transactions. Land registries around the world are interested in allowing the instant transfer of property ownership securely. Built in triggers that will release funds or exchange contracts upon receipt of a payment or a document. In the UK, 1 in 3 property sales falls through due to the length of time it takes to transfer. With the implementation of smart contracts, this will speed up the process as everything will be online and happen immediately. One of the biggest problems the property industry faces is the length of time it takes to purchase a property.
What is cryptocurrency?
Cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank or regulation system. Examples of cryptocurrency are Bitcoin, Litecoin, Dash and Monero. In order for a currency to be referred to as a cryptocurrency it needs to be decentralised which is the reason why Ripple is a contentious matter. Ripple is more known for its digital payment protocol.
The most recognised cryptocurrency around is obviously Bitcoin which has been around since 2009. In 2017 Bitcoin became very popular and reached valuations of almost $20K.
Can I buy a property using Bitcoin (cryptocurrency)?
This frenzy sparked the interest of some property developers who managed to sell the first ever property in Manchester using Bitcoin. This 4-bedroom house completed the first Blockchain property exchange. All transactions were recorded on the blockchain and distributed transparently between both parties.
Additionally, a London based build-to-rent developer has accepted Bitcoin as deposits for their properties. These are just two examples of how Cryptocurrency is starting to influence the property market. As technology evolves property investors and property buyers will be able to use the likes of Bitcoin, Litecoin, Ether and Ripple to purchase property or pay rent in the future.
One thing to bear in mind through is that cryptocurrency is extremely volatile with prices fluctuating up to 20% day-to-day, as the market is still unregulated and prone to manipulation and influence. It is not yet an effective payment system but is heading in the right direction. However, with the length of time it takes for a property to transfer or contracts to be signed, the Bitcoin price can fluctuate quite substantially.
How can we use cryptocurrency to invest in property?
So, we have spoken about how cryptocurrency might not be a suitable option to buying a property due to time and volatility, but what about investing in property with Bitcoin? Property investment companies are looking at tokenising properties so investors purchase tokens which are backed by a property or the companies’ property portfolio. So instead of purchasing £1 million, property investors could purchase 1 million £1 tokens. These tokens can be traded 24 hours a day 7 days a week as the markets never close. Thus, making your investment easier and more accessible to buy, sell and trade.
Investors could purchase tokens which get traded on an exchange and either increase or decrease in value. The tokens will be asset back, so fluctuation would be marginal, however still open to speculative volatility.
At the moment, Bitcoin and other cryptocurrencies are extremely volatile. To put this into perspective, if you had invested £100 into Bitcoin in July 2014, your investment would be worth £1,053 today which is 1053% over four years. However, If you had invested the same £100 at the peak in 2017 and cashed it in July 2018 you would have £32 and made a loss of 68%.
But is this all legal?
Although this technology is new and still finding its feet, the only way that it will be adopted by the public is if it becomes regulated and controlled. A key challenge at the moment is how it will be compatible with the current KYC (know your customer) and AML (anti-money laundering) guidelines.
Cryptocurrency operates on a technology that prides itself on anonymity. So, although the ledgers are transparent and open, it is almost impossible to determine who is making and receiving transactions.
In order to invest in property in the UK, investors need to complete the KYC before investing. Although the Cryptocurrency platforms follow a similar KYC process, there is a loophole which can potentially be exploited. It is very important for property investment companies to make sure that they understand the risks associated with investing in property through Cryptocurrency.
How will blockchain and cryptocurrency influence the property sector?
As companies start to learn more about blockchain and cryptocurrency and how it can be used in the property sector. We have already seen properties been purchased and property investment opportunities being spoken about. However, one user case which is being thrown around at the moment is putting the HM Land Registry onto the Blockchain.
This is not a short-term plan but something which could be in the pipeline for the future, drastically helping the property sector. Smart contracts will also speed up the time a property takes to transfer as well as making this a paperless process with everything being stored on the blockchain.
So, we have heard about what blockchain and cryptocurrency plan to do in the property sector, however what does the future look like? This technology could revolutionise the way people invest in property or buy and sell their properties. Some are comparing this new innovation to the internet boom of the 90s. When the internet first launched is was not initially sure how it would be used and look at it today, it has literally revolutionised our daily lives.
Is Property or Bitcoin a good investment?
Some of you might be thinking, ‘If Bitcoin is potentially the future and is making such high returns, shouldn’t I invest in Bitcoin?’. With any new market there is opportunity and risk, so you could make a lot of money, but you could also lose a lot of money. As mentioned above, if you had invested last year you would have made money, however if you had invested this year you would have made a loss.
It is also not very easy to invest in Bitcoin compared to investing in property. Investors can partner with a crowdfunding company such as Shojin Property Partners to invest relatively small amounts of money into property. Unlike Bitcoin, crowdfunding property investment companies look after your investment, and in the case of Shojin Property Partners, they actually co-invest their own money alongside investors in every investment.
Since cryptocurrency is a new form of investing, it is not regulated which means it is susceptible to market manipulation. Unlike property investment, which is regulated by the FCA (Financial Conduct Authority). Finally, another advantage of investing in property through crowdfunding is that investors can invest in property through their ISA. This allows you to take advantage of the £20,000 allowance in the 2018/2019 tax year.
To find out more about Shojin Property Partners, a UK based crowdfunding property investment company and how you can invest across the entire property spectrum using an ISA, then visit our website www.shojin.co.uk.