If you make money investing in cryptocurrency, ka-ching. You've won a lottery of sorts. By all means, if you're in the market for a home, use those newfound gains for the down payment, and welcome to the American Dream.
So what's the catch? Yes, there's always a catch, and here it is: Crypto is highly volatile. Says Redfin's chief economist Daryl Fairweather regarding crypto investing on Redfin's blog: "Some of those investments went up in smoke, but others went to the moon, or at least rose enough to help fund a down payment on a home."
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The situation
The number of first-time homebuyers who sell crypto to help with a down payment on a home rose in the fourth quarter of 2021 to 11.6%. That's up from almost 8.8% in the third quarter of 2020, and up from 4.6% in the third quarter of 2019, according to a survey by Redfin of 1,500 homebuyers and sellers. Most people (52%), however, still save down payment money from their paychecks.
As crypto starts becoming more mainstream, it's not surprising to see more and more transactions either conducted directly through crypto or through selling digital currency to get old-fashioned dollars. This is particularly prevalent in the home buying sphere, as younger people are typically first-time homebuyers, and that's the same demographic (millennials and Gen Z), mostly, that invests in crypto.
About cryptocurrencies
Cryptocurrencies are digital tokens or digital coins that exist on the blockchain, a digital ledger of transactions that's distributed across a network of computers. This system is supposedly impossible, or at least extremely difficult, to hack, and because it's finite, theoretically provides a hedge against inflation. But as with any new products, the best determiner of efficacy is time. And with crypto, the jury's still out.
The "safety" of Bitcoin
As cryptocurrencies go, Bitcoin is the granddaddy of them all. It's been around for 13 years now and is the most popular cryptocurrency in the world. There's risk involved with Bitcoin, of course, but Bitcoin is becoming more mainstream and being adopted by investors at a fast clip. It has a market capitalization of around $1 trillion, which is 38% of the industry.
Trailing Bitcoin is Ethereum, which is six years old and experiencing phenomenal growth largely because of its ability to support non-fungible tokens (NFTs), digital coins that represent real ownership of digital items. NFTs will largely be used in the metaverse, something akin to the idea behind The Matrix's red or blue pill: reality or simulation -- the metaverse being the blue (simulation) pill.
Beyond that, there are thousands of cryptocurrencies.
How much of a gambler are you?
If you gamble (invest) in crypto for the purpose of getting down payment money for a house, the best strategy is to be prepared to lose your investment. If you do cash in after using cryptocurrency for your house down payment, be prepared to pay taxes. Since the IRS considers crypto to be property, when you cash in and realize a gain, you need to pay taxes on that gain.
Crypto is volatile. Even if you made enough money for a house down payment, there's the possibility of missing out on even larger gains. If that happens, don't be too hard on yourself. After all, you have a new home to look forward to.
