Investment securities like stocks are in the middle ground when it comes to risk. Solo stocks are riskier for beginners, but derivatives like ETFs are not. Real estate. Returns on properties are slow, predictable, and relatively low-risk. Investment Liquidity Cryptocurrency. Digital currencies vary in liquidity. High-volume coins like Bitcoin and Ethereum are widespread and liquid.
A smaller cap digital currency might be harder to buy or sell. Stocks are high on the liquidity list. Property investments are among the most illiquid assets. Real estate demand is high, but selling it is an arduous task. Level of Regulation Cryptocurrency is a newer innovation. Before Bitcoin, engineers tried digital currencies with little success. Since then, governments have been slow to regulate crypto investments. You might have to deal with any fraudulent activity on your own.
A lot of effort goes into regulating stocks. Companies must fill out countless forms and paperwork to list on a stock exchange. Real estate investment is prevalent worldwide. Market regulations are strict due to high levels of investment. Expertise Required Cryptocurrency. Investing in crypto is simpler than investing in stocks and real estate. For beginners, the Internet is full of free educational resources. Everybody has access to cryptocurrency, including the unbanked. Stock investing can require more expertise and knowledge than crypto does.
Real estate tokenization is the process of fractionalizing real property into tokens stored on a decentralized database. This decentralized database stores information like a digital ledger and is commonly referred to as blockchain.
The distributed ledgers on which real estate tokens are captured are validated by the blockchain network, synchronized and shared with all network participants almost instantaneously, permanently recording an accurate ledger of transactions generally accessible to the public. Real estate tokens are similar to non-fungible tokens NFTs , which are non-interchangeable units of data stored on a blockchain that can be sold and traded, with the exception that real estate tokens are generally tied to the value of a physical asset.
A real estate token can represent, among other things: Ownership of part of a real property Ownership of the entire real property An equity interest in an entity that controls real property An interest in a debt secured by real property, or A right to share in the profits generated by real property Real estate tokens can also be differentiated from real estate investment trusts REITs since they allow for a specific investment linked to a particular real property, whereas REITs typically facilitate investment into pools of various real estate assets.
The digital tokens are created and issued on a blockchain during a security token offering STO , also referred to as a tokenized security offering or a tokenized asset offering. Each fraction of ownership is converted into a token and then encrypted to grant ownership. Ownership can then be transferred directly from investor to investor on digital securities marketplaces using alternative trading systems ATSs almost instantly for a relatively low fee.
Benefits of real estate tokenization I. Lower barrier to entry By facilitating investment in fractional portions of real property, real estate tokenization enables small-scale investor participation and lowers barriers to entry for retail investors. Lower minimums and smaller investment amounts can thus be leveraged to benefit from the potential high returns available to traditional real estate investments — which typically require significantly more upfront capital.
Ability to create liquidity Real estate tokens are easily and securely transferable by way of blockchain technology, allowing investors to diversify their portfolios, minimize risk and create liquidity in the real estate market. Conversely, issuers are provided access to a wider pool of investors. Lower transactional costs Through automated processes and a permanent unchangeable digital ledger, blockchain technology has the potential to streamline investment transactions and lower transaction costs.
As a result, investment transactions are generally completed faster and at a lower cost to the parties involved, facilitating higher returns for the investor. Tokenization also provides a host of other benefits, such as real time capitalization table tracking, improved accessibility and greater transparency for potential investors. Key considerations regarding real estate tokenization I.
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0X CRYPTO
Cryptocurrency speculators often trade for real estate in order to diversify their investments. But for the seller, this volatility means risk. So, accepting cryptocurrencies is a bigger gamble than with more traditional stable funds. However, sellers can obviously ask for the cryptocurrencies to be converted to cash, eliminating any risk factors. Other reasons for using crypto may include cashing out for their retirement, taking advantage of crypto property discounts, and speeding up and simplifying transactions.
The role of the Blockchain network the backbone of Crypto is another important facet of the emerging cryptocurrency trend toward estate transactions. The main advantage here is that buyers and sellers can eliminate the middleman in any transaction. Transparency is another reason Blockchain is utilized in transitions. The speculation market has calmed considerably and in its place is a more considered treatment of cryptocurrency that recognizes that, in fact, there are different types of tokens that have varying regulatory treatment and are useful for different purposes.
Today, several different types of cryptocurrency are recognized, and authors categorize them in varying ways. The types of cryptocurrencies derive their value in different ways and have different regulatory treatments. We will also distinguish between a coin, which has its own blockchain and a token, which is recorded on another blockchain. For purposes of our real estate discussion, I want to divide cryptocurrency into the following categories: Currencies These include Bitcoin and Litecoin and also include barter currencies like the Troptions Trade Options tokens and BC-REX bitcoin for real estate exchange.
Currencies are intended to act like digital money and are used to buy things. Currencies derive their value from the markets that accept them for payment. In this way, these currencies are just like dollars, euros, and other national currencies typically referred to as fiat currencies since they get their value because a national government says so. The value of a dollar is what you can buy with it just as the value of a Bitcoin is what you can buy with it. Security Tokens There are many security tokens and these types of tokens, along with utility tokens, represent the greatest current growth in the number of new tokens issued.
Security tokens derive their value from ownership of an underlying asset, like a company acting like stock in a company , real estate representing ownership of a property or the LLC that owns it , or artwork own a piece of a Picasso. These tokens are treated as securities by the SEC so all securities laws must be followed when issuing, selling, or trading these tokens.
Utility Tokens Utility tokens represent value within a particular company for its products or services. Examples include game companies that issue tokens that can be redeemed within a game for additional characters or capabilities. One of the best examples of a utility token though not a cryptocurrency since it is not on a blockchain is frequent flyer miles. Each mile is a digital token that is issued to airline customers when they buy tickets and can be redeemed with that airline for seat upgrades, free flights, etc.
It would not be at all surprising for airlines to convert their frequent flyer programs to utility tokens; it would be a good fit and may have marketing advantages. There are a number of potential uses within real estate investing for utility tokens.
These tokens are not treated as securities by the SEC. Smart Contracts Though other types of tokens and coins may be issued as smart contracts, I call out this category since it has broad implications in real estate. Smart contracts can implement numerous contract capabilities in an agreed upon and automated way.
Since the entire process of purchasing, selling, or investing in real estate involves contracts, new, faster, automated methods for implementing the transaction can be done via smart contracts. So how can these different types of cryptocurrency be used in real estate investing? There are numerous approaches.
Here are just five that may be some of the most interesting: 1. Purchase of real estate using cryptocurrency. This is one of the most obvious approaches. It uses currency tokens or coins and allows an investor to combine the rapid increase in value and some level of liquidity of the cryptocurrency with the stability, tax advantages, leverage of real estate. To date, most of the purchases of real estate with cryptocurrencies have been two stage transactions sell the cryptocurrency for cash and use the cash to buy the real estate.
But there have been some notable transactions of cryptocurrency directly exchanged for real estate. Cryptocurrency has especially strong potential for international sales since it is so easy to move the currencies without respect to borders we will see how regulators end up addressing this. Issuing security tokens as part of a real estate syndication. Most important is the illiquidity of private offerings. Security tokens can address all of these issues. They can make all investor management much more automated and transparent and have the potential to increase liquidity as long as the tokens are available on an exchange that enforces all the securities regulations using smart contracts.
