Are you playing The Long Game? Here’s What’s Next for Crypto

by Arthur · September 15, 2022

TLDR: Before the crypto market started to lose value this spring, some crypto house buyers started offering crypto to sellers. Why did the momentum falter and will crypto re-enter the Realtor lexicon?

When the crypto market hit new highs in November 2021, it grabbed headlines, and crypto enthusiasm spread to real estate. Some home buyers who had made money investing in crypto considered using this new currency to buy a home. Others preferred to borrow money to buy a home using their crypto as collateral. This allowed them to hold on to what had been a valuable asset and avoid paying capital gains.

Residential crypto infiltration slowed in 2022 as inflation rose and investors began moving their money away from risky investments. They sold stocks and cryptocurrencies, causing prices to fall.

In May, the crypto markets saw several major crypto companies fail, triggering 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.

Table of Contents

Stablecoin TerraUSD was the first domino to fall

Volatility in cryptocurrency adds uncertainty to 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 price in US dollars would be at closing.

If the 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. Good news for the seller, but not for the buyer. Conversely, if BTC fell in price, the buyer would benefit.

Stable coins was created to solve this problem. Stablecoins are a type of cryptocurrency whose price is linked to a stable government-issued currency. They provide predictable prices 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 Treasuries and commercial paper. Another type is not supported by assets. Instead, it is backed by an additional coin, and its stability is determined by an algorithm. These are “algorithmic stable coins.”

TerraUSD was an algorithmically stable coin, and its collapse triggered the contagion that brought down several crypto companies.

Terra is pegged to the US dollar, and every time its value dropped below $1, some of the Terra was removed from the market (“burned”) and replaced with $1 worth of the company’s sister coin, Luna. Terra holders could trade Terra for Luna.

The algorithm worked well, and the market capitalization reached $41 billion in April. But then the platform was challenged when several large withdrawals occurred. This led to instability, and customers lost confidence. The price decline began to accelerate and then plateaued.

The CEO of the largest crypto exchange Binance, CZ, explained: “The design flaw: minting coins (printing money) does not create value, it only dilutes the existing coin holders.” When the dust settled, $50 billion was gone.

Crypto lenders and a crypto hedge fund file for bankruptcy

Cryptocurrency and blockchain were created in response to the banking failures of 2008. The vision was to create a platform on the internet where participants could engage in financial transactions independent of the banking system. Participants could use cryptocurrency to pay for goods and services, borrow money and lend money.

The creators believed that excluding banks and regulators would facilitate faster transactions, lower fees and higher returns on loans. In traditional finance it is:

Investors who want to earn fees and interest by lending money.
Borrowers seeking loans who want to pay minimal fees and interest.
Merchants who want to pay minimal fees for the privilege of using a credit card network.

Crypto lenders offer 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. But when crypto prices fell, lenders too focused on growth and not enough on risk were vulnerable.

Cryptolenders Celsius Network, LLC and Voyager Digital Ltd. files for Chapter 11 bankruptcy

Celsius raised crypto by offering 18 percent interest to customers who deposited 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 money within hours of submitting their applications.

Celsius invested customer funds in risky loans, and when the cryptocurrencies began to fall in value, customers became nervous and many withdrew their money. This created a “run on the bank”, and on 12 June 2022 Celsius froze all customer accounts. According to the bankruptcy filing, Celsius owes its customers $4.7 billion.

Voyager offered its clients brokerage, custody and lending services. At its peak, Voyager had $5.9 billion in assets, and 97 percent of customers had less than $10,000 on the platform.

Their business suffered when crypto prices fell, but the death blow was a $650 million loan that Voyager made to another bleeding crypto company – crypto hedge fund Three Arrows Capital. Three Arrows filed for bankruptcy on July 15, 2022.

What now?

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 trustworthy. The lenders were able to pay out high interest rates when the market was strong.

As the price of crypto fell, customers who had not read or understood the agreements they had signed discovered that the unregulated crypto lenders did not protect or insure their customers’ funds. The customers had given an unsecured loan.

Not all major crypto companies failed. The crypto companies that understand and manage risk are still standing. Others have either shut down, are bankrupt, or are seeking help from booming crypto companies.

Legislators on Capitol Hill and regulators at the Securities & Exchange Commission (SEC), the Commodity Future Trade Commission (CFTC) and other departments and agencies are working on a regulatory framework to protect investors.

As politicians decide how to protect investors while supporting the crypto industry, clear rules will pave the way for crypto in real estate. Experienced real estate agents who are familiar with crypto will be ready to work with these clients.

Rich Hopen is an agent in the CØMPASS Short Hills, New Jersey office and writes a weekly newsletter, Crypto News for Realtors. Follow him on Twitter.