13 July 2021 Written by Mike Sites and Patrick Poirier
In recent months, with growth in the Non-Fungible Tokens (NFT) market, discussion toward real estate asset tokenization has been increasingly under the radar. We wanted to provide some context as well as issue caution to the potential dangers of this trend if it becomes widespread.
Real Estate versus Stock Market
The stock market differs from the real estate market by various aspects:
a) transaction timespan, b) ownership structure and regulatory reporting, c) asset value growth over time, d) investment and market risks.
- Transactions on the stock market can span micro-seconds. For example, many hedge funds have adopted high-frequency trading as an investment strategy to reduce market risks. Investment decisions can occur within a millisecond so that the direction of trades become much easier to predict. In contrast, real estate market transactions occur with a lengthy paperwork process that typically takes several weeks to complete.
- Stocks ownership can easily be fractional. Publicly traded companies are owned by thousands and even millions of investors. On the other hand, real estate is typically wholly owned by individuals, which is one of the greatest attractions of tokenization of NFTs. NFTs can easily facilitate ownership of real estate amongst many owners without involving centralized organization to track ownership shares.
- Given the timespan and ownership structure of real estate assets, the value over time tends to be a lot more stable and typically grows at a decent pace. This is low volatility and seen as a safe investment over the long run.
- Risks of asset depreciation in the real estate market is typically low, although as seen in the last few decades with Detroit, it is possible to see massive reduction of asset value. Overall, it is typically considered a safe investment with modest return potential in most cases. It is an asset class that is often the primary source of investment for low- and moderate-income families. The stock market is often more associated with high-net-worth individuals and investment groups.
The Danger of Tokenization
The tokenization of real estate with NFTs bring a potential massive reduction of the timespan it requires to perform transactions, going from weeks down to minutes and possibly seconds. Central organizations that keep track of ownership of real estate could be entirely automated with the blockchain and NFTs. As such, friction would become minimal, which in theory sounds great.
However, the danger is that now speculators and organized investment groups could start making investment decisions at much faster speed, just like they can on the stock market, which opens the possibility of market manipulations at a much higher probability.
This means, if widespread adoption of real estate tokenization happens, it is very likely the market would become vastly more volatile, which would essentially ruin low- and middle-class investment opportunity… panic selling would likely become rampant.
Volatility leads to Panic Selling and typical Pump and Dump scenarios
High volatility such as the stock market and the crypto industry often can be manipulated by the very wealthy who can afford to be patient. Less knowledgeable investors often fall prey to emotional decisions. These emotional decisions often lead to panic selling when the asset value is rapidly decreasing, as well as creating that fear of missing out impulse, and which further leads to buying when the asset value is high. This crippling cycle causes financial ruins for many investors in the stock market and the crypto industry alike. The real estate market investors could suffer the same fate if succumbed to NFTs that bring an accelerated transactional speed of the real estate assets.
Cryptium: A crypto-asset designed to protect value
Inspired by the long-term investment features that make real estate a safer investment option, AuDeFi, designed Cryptium. Cryptium provides upside growth while shielding against volatility and market manipulation.
Cryptium is the first of its kind to adopt a monotonically value increase (MVI) feature. The MVI can occur because Cryptium utilizes an elastic supply mechanism to protect owners. This means that although the price of Cryptium can be volatile, the value of your asset is protected. This makes the price irrelevant and value as paramount. If Cryptium’s price plummets, the quantity of Cryptium you own will increase to protect the value of your assets and consequently prevent panic selling.
Cryptium, and its MVI aspect, sits between a stablecoin (which offers no growth opportunity in comparison to the currency it is pegged against such as USD), versus all other crypto-currencies that suffer from high volatility (BTC, ETH, etc).
Cryptium is currently under development and the figure 3 above is hypothetical but hopefully help the reader understand how this asset class differs from figure 1 and 2 at the beginning. In the meantime a temporary Cryptium token is available for trading on Uniswap.
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