How to Mitigate the Risk of Cryptocurrencies in Real Estate

Real estate owners are starting to warm to the idea of cryptocurrency as a form of payment, both from tenants and in property transactions. However, there are some concerns keeping cryptocurrencies from penetrating the mainstream market—and the inherent risk is at the top of the list.

A recent Bloomberg article called Bitcoin’s volatility in valuation evidence that the cryptocurrency market is “unsustainable, stimulus-fueled frenzy.” Andrew M. Ouvrier, a partner at Cox, Castle & Nicholson LLP, also notes that this is one of the risks of using the currency in the real estate market. “On April 17, 2021, the value of Bitcoin plunged more than 14%, before rebounding slightly, causing the values of other cryptocurrencies to suffer similar large drops,” Ouvrier tells GlobeSt.com. “Then on April 23, 2021, the value of Bitcoin and other cryptocurrencies plunged further as a result of a massive sell-off that wiped out over $200 billion of market value due in large part to the announcement that President Biden is expected to raise long-term capital gains taxes. China’s recent announcement that it would crackdown on the practice of Bitcoin mining caused Bitcoin’s value to plunge even farther.”

These changes in pricing are a red flag for many owners. “This volatility creates a realistic concern that the Bitcoin that is accepted for rent on day one could lose a large percentage of its value on day two, although, of course, there is also the possibility that the value of the accepted Bitcoin might instead surge on day two,” explains Ouvrier, adding that investors are also concerned that the currently unregulated market could soon see increased government regulation. “There is also concern that U.S. regulators may be ready to tighten their oversight of digital currency and related businesses, which may have a chilling effect on cryptocurrency-based transactions,” he says.

Despite the risks, cryptocurrency only seems to be growing in popularity, and Ouvrier says that real estate players will need to address these uncertainties and mitigate the risks. “This may mean providing key employees with education and training on the cryptocurrency markets, or working with third party cryptocurrency advisors and cryptocurrency exchanges that can provide up-to-the-minute information on cryptocurrency prices and trends, in order to try to take advantage of the markets or to avoid losses,” he says.

Real estate players can also look at cryptocurrency as part of the strategy rather than a form of payment. “It may also mean looking at the acceptance of cryptocurrency in terms of an investment strategy where the goal is to seek to a diversified portfolio of income from the real estate, which might possibly include policies as to when cryptocurrency will or won’t be accepted, or limits on the amounts or types of debts for which cryptocurrencies will be accepted,” adds Ouvrier.

Of course, you can’t mitigate all of the risks that come with cryptocurrencies. In some instances, the risks will have to be absorbed into the investment model. “Mainstream acceptance of Bitcoin and other cryptocurrencies may mean acceptance of these risks as well as the potential rewards,” says Ouvrier. “The arrival and acceptance of cryptocurrencies is likely to continue advancing in the coming years. That makes it vital for companies to develop policies and plans so they are more comfortable with Bitcoin and other cryptocurrencies and able to manage the use of this form of payment in the future. Real estate developers who do will likely emerge as pioneering leaders on the cryptocurrency frontier.”