Is using crypto profits to fund a home down payment a good idea?
If you make money by investing in cryptocurrency, ka-ching. You’ve won some sort of lottery. By all means, if you are looking for a home, use these new earnings for the down payment and welcome to the American dream.
So what’s the catch? Yes, there is always a catch, and here it is: Crypto is very volatile. According to Redfin Chief Economist Daryl Fairweather regarding crypto investing on Redfin’s blog: “Some of these investments went up in smoke, but others went to the moon, or at least increased. enough to help fund a down payment on a house. “
The number of first-time buyers selling crypto to help put down a down payment on a home increased in the fourth quarter of 2021 to 11.6%. This is up from nearly 8.8% in the third quarter of 2020 and 4.6% in the third quarter of 2019, according to a survey conducted by Red tuna of 1,500 buyers and sellers. Most people (52%), however, still save money on their down payments on their paychecks.
As crypto begins to become more mainstream, it’s not surprising to see more and more transactions being done directly through crypto or by selling digital currency to get dollars the old-fashioned way. This is especially prevalent in the home buying arena, as young people are typically first-time buyers, and it is mostly the same demographic (millennials and Gen Z), who invest in crypto.
Cryptocurrencies are digital tokens or digital coins that exist on the blockchain, a digital ledger of transactions distributed over a network of computers. This system is supposed to be impossible, or at least extremely difficult, to hack, and because it is finished, theoretically provides a hedge against inflation. But as with any new product, the best determinant of effectiveness is time. And with crypto, the jury is still out.
The “security” of Bitcoin
As cryptocurrencies disappear, Bitcoin is the grandfather of all. It has been around for 13 years now and is the world’s most popular cryptocurrency. There is of course a risk with Bitcoin, but Bitcoin is becoming more and more mainstream and being adopted by investors at a rapid rate. It has a market capitalization of around $ 1,000 billion, or 38% of the industry.
The bitcoin follower is Ethereum, which is six years old and experiencing phenomenal growth largely due to its ability to support non-fungible tokens (NFTs), digital coins that represent the beneficial ownership of digital objects. NFTs will be used extensively in the Metaverse, something akin to the idea behind The matrixred or blue pill of: reality or simulation – the metaverse being the blue pill (simulation).
Beyond that, there are thousands of cryptocurrencies.
How much of a gamer are you?
If you are gambling (investing) in crypto for the purpose of getting a down payment for a house, the best strategy is to be prepared to lose your investment. If you cash in after using the cryptocurrency for your house down payment, be prepared to pay taxes. Since the IRS views crypto as property, when you cash it in and make a gain, you have to pay taxes on that gain.
Crypto is volatile. Even if you’ve earned enough money for a down payment on the house, you might miss out on even bigger wins. If this happens, don’t be too hard on yourself. After all, you have a new home to look forward to.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.