Cryptocurrencies: Can you buy a home with digital money?

A quaint Spanish-style home, four bedrooms and two-and-half- baths with a garden suite, recently sold in the west-central Florida city of Gulfport. While that news by itself isn’t particularly noteworthy, the way the transaction happened is. This was believed to be the first home in the United States purchased as a non-fungible token, or NFT. NFTs are crypto assets, built on blockchain technology similar to cryptocurrency.

Cryptocurrencies have been making big headlines as of late, as the prices of Bitcoin, Ethereum and Dogecoin have skyrocketed during the first part of the year. Cryptocurrencies and the blockchain technology that supports these digital assets promise to potentially revolutionize traditional financial systems.

But as this new technology intersects with legacy financial systems, questions arise, like: can you actually buy a house with them? Turns out the answer, like much related to cryptocurrencies, is complex.

A brief, brief intro

So what are cryptocurrencies, and how do they work?That could take a while. We’ll be focused on the homebuying implications of cryptocurrencies (and less on the technology themselves), but here’s a super simple definition to get the ball rolling.

What are cyptocurrencies?

Cryptocurrencies are a kind of digital asset that operate across a large, distributed computer network. The currency can be sent from one individual to another using a unique digital address (referred to as a wallet), and all transactions are encrypted using a cryptographic system. (For more info, here’s a brief video that explores how they work).

One thing to keep in mind for those new to the space is that, while cryptocurrencies have dramatically risen in prices during the last few years, they have been a very volatile asset class since their inception. Because of the high risk related to the price change, you should consult with a financial advisor before proceeding with any investments in cryptocurrencies.

Going home with crypto

The easy way: cash out

If you personally hold cryptocurrencies and want to buy a home with them, the easiest way to do so is to cash out your crypto for dollars. Doing so just requires finding a buyer for your cryptocurrency, which can be found through any number of online exchanges.

After exchanging your crypto for dollars, you will transfer the dollars to your bank account, then use said dollars to pay for part (or all) of your home purchase. Make sure that you are working closely with a lender and following their guidelines for verifying the funds.

The plus side to this approach is that everything takes place using USD, which makes the process simpler for you, the seller, lenders, and the U.S. government.

Slightly more challenging: a hybrid model

Then there is what’s called a hybrid approach, in which cryptocurrencies are involved in part of the transaction. An example would be a sale in which a buyer transfers some portion of the total balance due at closing in Bitcoin and the remaining balance in USD. This approach would only work in an all-cash transaction, not one that involves obtaining a mortgage or working through a lender.

The challenge with this approach can be finding both sellers willing to accept direct transfer of cryptocurrencies, as well a way to handle the logistics. For the first single-family home sale ever recorded in Texas involving Bitcoin, the participants completed the transaction using BitPay, an app that turns Bitcoin into dollars.

It’s worth keeping in mind that even in this hybrid approach, you can’t pay your title company, escrow fees or taxes in crypto, so those would require traditional dollar currency.

All crypto, all the way

Then there’s the small (but growing) percentage of home sales in which a buyer can pay the seller directly in crypto. These would typically require a buyer transfer their cryptocurrency from their wallet to the wallet of the seller, via an exchange.

Some search tools are making it easier to find properties you can purchase with Bitcoin , including editing their search engine to allow you to look for the words “Bitcoin” or “Ethereum.” Brokerages have also joined in, and have begun listing properties where the seller only wants to be paid in cryptocurrency, sometimes specifying a specific investment vehicle.

This option is still very much on the fringes, and is not for the casual crypto observer or user. But if cryptocurrencies continue their movement into the mainstream, purchases like these could become a new norm in the years ahead.

The NFT option

Then there’s how the sale in Gulfport, Fla. went down. The buyer of the property purchased the home using 210 ETH, commonly known as Ethereum, a cryptocurrency platform. This equated to around $653,000 at the time of the sale.

The seller then transferred the necessary documents to show proof of ownership as an NFT. Some crypto proponents consider NFTs a more secure way of recording transactions than traditional paper, which can get lost, ruined or forged. The details of this smart contract will be stored on the blockchain, where they will theoretically live forever.

It’s not all gravy…risks and considerations

Because of the complex and evolving nature of cryptocurrencies, using them to purchase real estate is not without certain financial and logistical considerations.

Uncertainty around future prices

The one thing that’s been constant throughout crypto’s time in the spotlight is that prices can change—both for the better or for the worse.

Prices for Bitcoin and Ethereum have surged throughout most of 2021, which means investors who cash out now to pay for a home might miss out on future gains. While high demand has led to double-digit year-over-year prices increases in homes in many markets, those increases can’t compete against the 582% increase Bitcoin has seen from the start of the year through May 9, 2021.

On the flip side, their volatility means cryptocurrencies can also be a source of potential losses, with Americans losing a collective 1.7 billion trading Bitcoin in 2018. If your cryptocurrencies have performed well, maybe now is the time to cash out (and get off the roller coaster).

The role of lenders

When it comes to cryptocurrencies, lenders are still evolving their knowledge of the space. Regulators and mortgage entities are just beginning to put out their subjective guidelines on how to assess the creditworthiness of crypto assets.

Fannie Mae and Freddie Mac currently require proceeds from Bitcoin and other digital currencies to be converted into U.S. currency in order to be eligible assets when underwriting a loan, and is requiring documentation showing the digital currency was owned by the borrower.

Again, as the technology evolves you can expect lenders to adjust their guidance accordingly. But for the moment, lenders are continuing to be cautious with crypto—both for the sake of their customers and their industry.

The road ahead

As with any new technology, cryptocurrencies offer a healthy dose of both transformative potential and head-scratching questions. The new and exciting space is evolving every month, and doesn’t show any signs of fading away, which means traditional finance systems and processes will have to evolve.

Buying a home with cryptocurrencies is possible, though it does come with some hoop-jumping. But as with any part of the homebuying process, it’s always best to talk through your financing options with an experienced loan officer and direct your questions about crypto to an experienced financial advisor—so that you can make the right financial decision for you.