Bitcoin and other cryptocurrencies have been in the news a lot lately. No wonder, being as Bitcoin has taken a stratospheric rise in value of over 2100% in the past year alone. To put that into perspective, if instead of putting a $25,000 down payment on a property, had you purchased Bitcoin a year ago with the same $25,000, your Bitcoin would be worth over $500,000. It would be worth double that if you purchased it a year earlier.
With more holders of cryptocurrencies than ever, does this mean you should start letting your renters pay rent in Bitcoin? The short answer is… probably not. Let’s review why.
Always accept payment in the same currency as your expenses. If you have a mortgage and other recurring expenses on your property, you should be requiring rent in the same currencies. This holds true for cryptocurrencies as well as foreign currencies. Reason being is that exchange rates change all the time but your mortgage payment doesn’t. If you accept rent in currency A and pay your mortgage in currency B, there is no guarantee that currency A is going to cover the cost of your mortgage due to fluctuations in currency. As such, always collect rent in the same currency you use to pay the property costs.
Bitcoin is out of control and unpredictable. Cryptocurrency is on an uncontrollable upward spiral at the moment, but because of the volatility of cryptocurrencies that spiral can easily change direction tomorrow. If you accepted rent today at a value of $1,200 in Bitcoin, then when you withdraw that Bitcoin into cash to pay your mortgage it might be worth $1,000 or even less. In contrast, if you accept $1,200 cash it will be worth $1,200 in a week, a month, and a year towards your other cashed based bills. No such guarantee exists with Bitcoin.
Bitcoin is unregulated and risky. There’s no government or organization ensuring that Bitcoin doesn’t crash causing all of its value to disappear tomorrow. Unlike cash, silver, gold, or any other tangible commodity, Bitcoin is made up of bits and bytes that are not controlled by any organization. This can cause it to have wild shifts in value, both directions. Think about this. According to Bloomberg, a mere 1000 people own 40 percent of the bitcoin market. It’ll only take a handful of these 1000 people to decide it’s time to cash out which may cause a ripple effect where many others sell causing the value to come crashing down.
Let’s analyze that last scenario one step further. If just 20 of those 1000 people decide, “hey, let’s manipulate the Bitcoin price”, they can by simply bulk selling their bitcoin causing a value crash. They would sit back and let the crash happen, then buy back the same Bitcoin they sold at $17,000 for $25. This is called collusion and is forbidden in traditional markets, but since bitcoin and other cryptocurrencies have no regulation there is nobody stopping this from happening.
Bitcoin is hackable. Because Bitcoin exists only in computers and the internet, it is very vulnerable to hacking. In fact, just last week a Bitcoin company called NiceHash got hacked and hackers walked away with over $70 Million worth of bitcoin. Because Bitcoin is untraceable, finding the hackers will prove extremely difficult and maybe impossible. Additionally, unlike putting money into your bank account which is FDIC insured, Bitcoin are not insured. If they get lost, stolen, hacked, or misplaced, they are gone forever. This isn’t the only hack, there have been dozens of other bitcoin heists in which people have lost billions of dollars.
Bitcoin isn’t liquid. It’s common practice for Bitcoin wallet providers to take days or weeks to complete a trade. As of the time of this writing, because of the current volatility of the market, one of the most commonly used Bitcoin wallets takes 10 days to complete a purchase or sale of Bitcoin. So at the earliest, if your renter pays you today in Bitcoin, you might be able to convert those to dollars in ten days. Compare that to ACH which is fully liquid in 48 hours.
Software doesn’t support it. If you are a savvy landlord using software designed for property managers, then you know it’s super easy to accept ACH (electronic check) and credit card payments for rent. These transactions are traceable, legal, and backed by major banks. None of the major software platforms for property managers will touch Bitcoin just yet. Those that have tried do a quick turnaround to immediately convert it to US Dollars, but that adds additional transaction fees, delays, and substantial risk.
It might be a tax nightmare. The IRS doesn’t treat bitcoin and other crypto-currencies as money. They instead treat it as an asset which opens up additional tax consequences because you may just have to report not just on your income, but on the product you received and what it’s value was when you received it, and what it’s value was when/if you turned it back into cash. This is three IRS reporting transactions vs one for accepting cash. Not to mention that you have to keep meticulous records of the exact value of bitcoin the minute you received it and again the minute you convert it. To learn more about how the IRS taxes cryptocurrency, check out this article on Investopedia: Are There Taxes On Bitcoins?
Courts don’t yet understand it. Finally, let’s say nothing above has caused you to second-guess accepting rent in Bitcoin. The final nail in the coffin might be that courts don’t yet understand it. If you accept Bitcoin, and your renter says they paid you in this untraceable anonymous currency, how do you prove they didn’t? If you find yourself in an eviction situation and the tenant indicates they paid you and they provide a cryptic Bitcoin receipt how is the court supposed to make heads or tails of it. Look at the example blockchain transactions receipt here, and tell me if you understand who it is from or to. I don’t know about your county, but in my experience, if a tenant has any proof that they paid and you can’t prove otherwise, it will at the very least prolong an eviction.
If however, you don’t accept Bitcoin at all by policy, then if they provide a cryptic looking Bitcoin receipt to the court claiming to have paid, you can simply say “we do not and have never accepted Bitcoin as payment”.
So while providing another method of payment might be more convenient for some tenants, it is still too risky. Until your mortgage bank begins accepting mortgage payments in Bitcoin, I wouldn’t risk allowing tenants to pay in it.
On the flip side, if you are looking for a new market to play with expendable money (ie. not rent revenues), then Bitcoin might be worth investigating. The risks are great but the rewards have paid off handsomely for investors who purchased Bitcoin in 2016 or early 2017 and already cashed out. Those still holding onto their Bitcoin investments might find their values to lose the same 1700% they gained, and it could happen suddenly without warning. Many investment advisers recommend investing no more than 1% of your available cash into Bitcoin. Keep the rest in safer investments.