Blockchain is a diverse digital technology used by cryptocurrencies like Bitcoin and Etherum. The adoption of blockchain technology has significantly impacted the financial services industry. Due to the decentralization of the blockchain platform, transactions such as mortgage loans can be made swiftly, seamlessly and with complete transparency. Blockchain real estate applications have also proven to be disruptive to the real estate industry. That opens up new options for real estate investors. Here’s what you need to know.
Consider working with a financial advisor on taking full advantage of investment opportunities that come from blockchain.
What Is Blockchain?
Blockchain is a digital database that stores information. It is different from a traditional database because the information is encoded into blocks that can be linked together, using cryptography, to form a blockchain. Each block has identifying information encoded on it. Blockchain technology, in general, is a series of computers and nodes tied together to make up a peer-to-peer network. In the past, it has been used largely for assets denominated in cryptocurrency like Bitcoin. Blockchain is a very complete, transparent ledger system that includes all the existing blocks of information that have been stored over time.
Blockchain is starting to become more mainstream with applications both in the financial services industry and in the real estate industry. Even though you hear about Bitcoin in the news, the other story is blockchain, Bitcoin’s underlying technology, and how it can improve and modernize a variety of industries.
One of the beauties of blockchain is that it has the ability to divide assets into smaller, tradeable, slices of ownership that you, as an investor, might want to purchase. Each piece of a tradable asset is called a digital token and it represents partial ownership. Let’s say you want to engage in buying commercial real estate. An investor usually has to buy a whole property or none at all. Using blockchain and its system of tokens, you can buy fractional shares of commercial real estate property.
When real estate is tokenized, even smaller investors can diversify their portfolios with commercial investment properties they might not be able to afford otherwise. They can diversify with fractional shares of the property.
Blockchain and the Real Estate Market
Blockchain is changing the real estate market in these ways:
Facilitates decentralization and transparency
Blockchain, due to the way it is organized as a system of computers and nodes available to everyone who owns a block, does not have information available to only a broker, attorney and select others. It is decentralized and transparent to anyone with access to the block.
Saves money for both buyers and sellers
Because blockchain cuts down on the need for real estate brokers and financial intermediaries it can save on commissions and other fees buyers incur. It cuts down on the documentation usually required by realtors. It can also list the properties. As blockchain further develops, appraisal fees and loan fees also could decline or disappear.
Provides real estate markets, fractional ownership
New marketplaces are being developed for the smooth transition of real estate, which can now be tokenized. An example is the Atlant software. Real estate is tokenized in order to provide small real estate investments. Also, blockchain helps out small investors by assuring them that they will be able to buy fractional shares of commercial real estate buildings or property by tokenizing the real estate.
Allows for liquidity in the real estate market
Real estate is known to be one of the most illiquid assets. Blockchain technology increases the liquidity of real estate. Since there can be more than one owner, through fractional shares of a plot of real estate an investor in that plot of real estate can always get a portion of the equity out of the plot.
The Downsides of Blockchain
Blockchain does have some disadvantages:
- Speed – Legacy technology systems are – currently – much faster than blockchain.
- Personal data – If personal data accidentally gets on a block, it’s there forever. Blocks cannot be changed.
- Power – Blockchain requires a huge amount of computing power and electricity. That means that it is not environmentally friendly.
The Bottom Line
Blockchain will grow and change over the coming years as technology and innovation progress. It will get both easier and faster. For real estate investors, sellers and buyers, that means transactions executed more quickly and transparently at a lower and lower cost. But it’s still be developed. Various algorithms for different cryptocurrencies to run on are being tested. Researchers are trying to overcome the disadvantages of blockchain technology while it is already moving into the mainstream, at least in some economic sectors. If you’re interested, now is a great time to become familiar with this trend.
Tips for Investing
- If you have a portfolio of real estate assets, you may want to speak with a financial advisor since the entry of blockchain into the real estate market creates opportunities that you may want to take advantage of. Finding a financial advisor doesn’t have to be difficult. Use the SmartAsset financial advisor tool to find a financial advisor in your local area who suits you and your investment goals. If you’re ready, get started now.
- Alternative investments and their platforms include the cryptocurrencies like Bitcoin and Ethereum that use blockchain technology. To consider them as part of your portfolio, check out SmartAsset’s asset allocation calculator for assistance.
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