Real estate

Bitcoins seem unlikely currency for homes


Will home purchases and mortgages ever be transacted in Bitcoins?

That this question is asked with increasing frequency is an indication of how far the Bitcoin phenomenon has come. Still, any answer at this point is highly speculative.

Real-estate transactions won’t be executed in Bitcoins before Bitcoins become a generally acceptable form of money.

Although a number of items can be purchased with Bitcoins, acceptability is limited, and real-estate transactions are unlikely to be among the early adopters.

If the existing dollar-based system continues to work effectively, the use of Bitcoins in real-estate transactions might never happen.

Bitcoin is a decentralized digital currency that allows payments to be made over the Internet without an intermediary.

A Bitcoin is a computer file owned by someone, say A, who can discharge a debt to B through the transfer of the file to B, without any third-party involvement.

To prevent A from using the same Bitcoins to purchase something from C, the transaction with B is recorded in a public file called the block chain. Every transaction is checked against that file, so if A tries to use the same Bitcoins twice, the second attempt will bounce.

Whether Bitcoin has or will have all the features required for general acceptability as money will determine whether it will be considered money. Two required features that it has are homogeneity and divisibility. Every Bitcoin is identical, and Bitcoins can come in any denomination. In these respects, Bitcoins are just like bank deposits.

Another required feature, more nebulous but equally critical, is credibility. When I try to explain Bitcoin to friends, they invariably ask, “What is the backing?” This is another way of asking about the source of Bitcoin credibility.

Historically, all the monies of which I am aware have either had some nonmonetary value, the best example being gold; were convertible into assets with nonmonetary value at a fixed price, such as notes issued by banks that were convertible into gold; or were issued by or on behalf of government, such as our current Federal Reserve notes.

Bitcoins, however, are computer files with no intrinsic value. No third parties offer to convert Bitcoins into any other assets at a fixed price. And Bitcoins don’t have the backing of any government. Some governments, such as China’s, have taken steps to curtail its use.

Yet none of this means that Bitcoin would be unable to acquire credibility in a way that is different from that of all prior monies, and that was a major purpose of the anonymous guru who designed the system. It not only was made tamper-proof but also has a built-in mechanism for regulating and limiting the total supply of Bitcoins that can ever become available.

In time, this could make the Bitcoin system more credible than those that depend entirely on the sponsorship of government, which all too often breaks down.

Finally, money must provide a relatively stable store of value. No one wants to be paid with assets that can decline sharply in value shortly after they have been received.

Bitcoins don’t meet this requirement, because the value of one Bitcoin in dollars has fluctuated wildly to date. That should be expected for a new program, however, and there have been indications of greater stability in recent months. If the market continues to grow, it is reasonable to assume that Bitcoins’ value will become increasingly stable.

The outlook for Bitcoin is influenced by the fact that it is developing in countries that already have functioning money systems, which makes Bitcoin a second type of money.

This has been a major advantage to Bitcoin acceptability because it has largely neutralized the negative effect of value instability. The price of an item or service can be set in dollars (or euros, etc.) and the transaction executed in Bitcoins at the dollar price of the Bitcoin on the transaction date. This would work even for a house purchase, in which final payment might be deferred for weeks or months.

On the other hand, the long-run prognosis for Bitcoin depends on its ability to replace the existing money system in at least some major uses. To do that, it must provide cost savings in a transaction or some other benefit relative to the existing money system.

The greatest potential seems to be the markets in which transaction costs are high relative to total transaction value. This would include credit cards and cross-border transactions that require conversion of one currency into another.

As long as the existing money system works well, I don’t see any potential for the use of Bitcoin in real-estate transactions, because transaction costs are a trivial part of transaction values.

Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. Visit him at