This is an opinion editorial by Leon Wankum, a HODLer who is active in real estate and venture capital with a master’s degree in financial economics.
Real estate has proven to be an effective store of value over the last few decades, with property prices around the world having risen sharply since the 1970s. This development coincides with the "Nixon shock" of August 15, 1971, when U.S. President Richard Nixon announced that the United States would end the convertibility of the U.S. dollar into gold.
Since then, central banks around the world have started operating a fiat-based monetary system with floating exchange rates and no real currency standard at all. The money supply has been rising steadily ever since. As a result, real estate has become so valuable because it serves the world as the primary asset to store value and protect wealth from resulting inflation. Around 67% of global wealth (with some estimates putting the figure at $330 trillion) is stored in real estate.
In the past, people owned real estate for its utility value, which is characterized by the fact that you can live in it or use it for production. However, today, most people, especially wealthy individuals and institutions, own real estate to store value. In addition, from about 2008 to 2022, there has been a low to negative interest rate policy around the world, which has prompted investors to withdraw their savings from the bank and invest them.
But even more recently, macroeconomic and geopolitical headwinds have exposed the weakness of real estate as a physical store of value and demonstrated the benefits of bitcoin as a digital store of value.
Destroyed house in Bucha, in the Kyiv region of Ukraine. Source: Reuters.
Physical Vs. Digital Stores Of Value
Some of the benefits of using bitcoin as a store of value became evident in Ukraine last year. After the escalation of the Ukrainian-Russian conflict on February 24, 2022, some Ukrainians turned to Bitcoin to protect their wealth as they fled their homes. Real estate, on the other hand, would have had to be left behind. In German, real estate translates to “immobilie,” which literally means “to be immobile.” Owning real estate creates a local dependency that can pose a problem in a world of ever-increasing conflict and radicalization.
What do you do when war breaks out? You can't take real estate with you. This may sound like a dystopia to some, but if you are serious about long-term wealth management, you should consider the worst-case scenario. The fear of a third world war, in whatever form, is not at all illogical. Who would have thought that there would be war in Europe as we see today? Perhaps we are already in the middle of World War III. Real estate is not only difficult to move or liquidate in times of crisis, it is also expensive to maintain, easy to destroy, tax and confiscate. I will go into more detail about that in a moment.
Bitcoin, on the other hand, is relatively easy and cheap to maintain. You don’t have to worry about daily maintenance, rent or repairs in the way you do with real estate and can self-custody your bitcoin.
Bitcoin is a digital commodity, one does not have to worry that it will be destroyed in the event of war. It is digital information. Bitcoin is more powerful than the top-500 supercomputers in the world combined. The internet is at greater risk of collapsing than the Bitcoin network and our bank accounts are at greater risk of being hacked than Bitcoin, which is more secure than any other digital infrastructure that has ever existed due to its decentralization.
Taxation
Totalitarian states use taxation to oppress minorities, dissidents and ethnic groups. “Judensteuer” or “Judenvermögensabgabe,” for example, refers to various taxes or anti-Semitic levies to which Jews were subjected in Nazi Germany. These were used by the German state to deprive Jews of their livelihoods. In addition, Germany had financial problems in the 1930s due to the high reparations that had to be paid to France after losing the first world war. The wealth of German Jews was relatively easy prey for improving the German state budget.
When states face bankruptcy, they often begin to arbitrarily tax citizens. Tangible assets such as real estate are particularly easy to tax due to their physical natures. Bitcoin, on the other hand, is difficult to tax, due to its digital nature. Thus, it is hard for totalitarian states to steal bitcoin. Given the ever-present possibility of totalitarianism, conflict and the fatal consequences that these can have on our personal freedoms and prosperity, it is important to keep a significant portion of one's wealth in a sound and mobile digital asset such as bitcoin, rather than tangible assets like real estate that are costly to maintain, and easy to destroy, tax and confiscate.
The Risk Of Confiscation
I still remember very well the stories of the older Jews that I heard during the breaks in synagogue during my childhood in Hamburg, Germany — the horrors of the Holocaust and the constant fear of property confiscation and the associated inability to organize an escape or start a new life abroad. I remember one elderly gentleman in particular who proudly told me that he had diamonds in his molars in case he had to fly out of Germany again. These stories shaped me a lot and allowed me to understand the value of bitcoin.
The auctioning off of Jewish property was very popular in Nazi Germany, as shown here, from the city of Lörrach, during such an auction that many happily attended. Source.
The fate of the Jews in Nazi Germany is a painful history lesson that teaches us the importance of property rights and the need to store wealth in a digital asset like bitcoin that is difficult to confiscate and easy to move or liquidate in times of crisis. Unfortunately, the repressions against Jews were not isolated cases in history. Property confiscation happens all the time. Many lost their property in Cuba when Fidel Castro took over, as Michael Saylor likes to point out.
“Seizing companies and seizing buildings is easy,” Saylor has said. “It’s easy to nationalize an oil company. It’s easy to seize all the gold. It’s very difficult to seize passwords in people’s heads.”
In contrast, bitcoin is property that truly belongs to you. When stored in cold storage (offline), bitcoin are the holder’s alone and are not at risk of confiscation by third parties. In addition, little can stop you from selling or taking bitcoin with you. You are not dependent on lengthy, bureaucratic processes as with real estate transfers. In case you need to relocate, you just need to memorize 12 or 24 words, the backup (seed phrase) for your bitcoin wallet. You could escape a war zone, restore your bitcoin wallet with the backup and have access to your wealth again. This is truly revolutionary and a value proposition that will result in exponential demand for bitcoin and subsequent price increases due to bitcoin's fixed supply cap of 21,000,000.
When demand increases and the supply remains near constant, as is the case with bitcoin, the price must increase, mathematically speaking. There is also the fact that there is not only a limited supply of bitcoin, but that there will be less bitcoin over time because as, for example, passwords are forgotten or people who own bitcoin are no longer able to access or transfer it for various reasons. Due to unpredictable technological advances, it could be possible to crack certain wallets in the future. However, not all bitcoin that are “lost” will be found.
Bitcoin serves as an excellent hedge against the threat of war, destruction, taxation and confiscation. It is easily portable, noncustodial, censorship resistant, divisible, durable and easy to move or liquidate in times of crisis. It is the ideal store of value.
Bitcoin Is Digital Real Estate
Bitcoin offers easy access to property, the ability to store value and build wealth — functions traditionally fulfilled by real estate. However, bitcoin fulfills these functions much better. Given bitcoin’s vastly superior properties as a store of value, it has the potential to absorb a significant portion of the monetary premium that real estate carries as a store of value today. Until now, bitcoin has largely been understood as an alternative to gold (which has a market cap of $12.9 trillion) due to its limited supply and excellent monetary properties. However, it is a direct competitor to the world's most used store of value, real estate, an asset with a market cap of $330 trillion.
If we assume that bitcoin will absorb 10% to 15% of the real estate market cap over the next few decades, it has the potential to become a $30 trillion to $50 trillion asset. That would mean $1.5 million to $2.3 million per bitcoin if the bitcoin supply were at its theoretical maximum of 21 million.
Nobody can predict the future, but this calculation should clarify what opportunities Bitcoin presents. It therefore makes sense for a real estate investor to get involved with Bitcoin at an early stage. It is well known that those who adopt new technologies first will benefit the most.
I've been a Bitcoiner for over 10 years. In 2012, during my philosophy studies, I heard about Bitcoin for the first time. In 2016, I started working full time in the real estate industry with a focus on project development, renovation and real estate management in a family office. For a long time I thought that real estate and Bitcoin didn't have much in common. However, this is not the case.
When Saylor began speaking publicly about the Bitcoin strategies his company MicroStrategy is pursuing in late 2020, I realized that I too need to think about how we can bring Bitcoin into our real estate business. It quickly became clear to me that bitcoin, as a store of value, is in competition with real estate, which is used as such. So, I came to the conclusion that real estate investors whose business is the acquisition and construction of physical property are destined to hold bitcoin, since it is digital property. This statement may surprise you, but who would have thought in 1995 that many retail stores would eventually also have a digital business in the form of a website or e-commerce store? Of course, e-commerce websites and retail stores are more alike than bitcoin and real estate are, but it's the best comparison to show the need for real estate investors to get involved with Bitcoin
In addition, bitcoin's price potential is significantly higher than that of real estate, which has already completed its adoption cycle as a store of value. As deflationary money, bitcoin can also support real estate developers in their core work of project development and maintenance, which are cost intensive. Construction cost and utilities increase with inflation. Bitcoin can help protect capital from inflation and thus position project developers for the future. Furthermore, the real estate industry is currently being plagued by geopolitical and macroeconomic issues. This is likely to increase in the future. Bitcoin offers a serious solution to build capital reserves outside of the turbulence of the existing financial system.
Consequently, for any real estate investor who is a rational market participant, the following questions should be asked: How can I accumulate as much bitcoin as possible as quickly as possible while it is still relatively cheap? And how can I add a Bitcoin strategy to my core business?
Bitcoin Strategies For Real Estate Investors
Based on my personal experience, I will outline four strategies for real estate investors to accumulate bitcoin. Which strategy you follow depends on your conviction, the size of the real estate portfolio you own, your experience and your risk tolerance. I will also explain how a Bitcoin strategy can potentially support real estate investors in their core businesses of property acquisition, construction and management.
One: Use Some Of The Profits From Your Business To Buy Bitcoin
Bitcoin's advantages over real estate in its function as a store of value should not distract from the profitable business of real estate development. I'm not asking you to stop developing real estate, I'm asking you to add a Bitcoin strategy. If you're running a successful real estate development business, it probably wouldn't be a good idea to stop overnight and focus all of your attention on Bitcoin, especially due to the high debt burden that real estate development brings with it and which must be paid back. Rental income from completed properties is necessary to pay down debt over time.
Bitcoin is a near-perfect store of value, but it does not generate income to pay off debts, for example. Speculating on bitcoin’s price increases to pay off debt incurred to build or purchase a property carries a lot of risk, because bitcoin is volatile and therefore not suitable for planning monthly interest payments. However, you can use part of your profits that you make from the real estate business to accumulate bitcoin.
How much is up to you, but 10% to 25% seems reasonable to participate in Bitcoin's exponential growth without impacting a core business. You would still have more than enough capital to continue your existing real estate business and meet all of your obligations, but also to buy bitcoin with enough capital to properly position yourself for the digitization of property. Many retail companies missed the leap into e-commerce and surely suffered significant business losses as a result. Real estate investors unwilling to delve into digital property (bitcoin) will face a similar fate.
Two: Use Rental Income To Buy Bitcoin And Build Reserves
If you bought real estate with the vision of holding it for the long term and living off of the cash flow, you can buy bitcoin with the rental income from your real estate. On top of that, bitcoin is the perfect money to build maintenance reserves as it is disinflationary (meaning there will be less supply over time).
If the supply of a money remains almost constant or decreases and the demand increases over time, the price of the money increases. Demand for bitcoin will increase over time due to its exceptionally good monetary properties. This means that bitcoin gives you increased purchasing power in the long term, which can be used for maintenance and modernization measures, which are important in order to maintain the value of a property.
Given the high levels of monetary inflation in fiat currencies, simply holding the rental income in a bank account is not a sufficient strategy. Inflation will melt the value of your cash flow. In addition, regulation and ESG requirements will increasingly force property owners to “modernize” in the future, which is likely to continuously increase property maintenance costs over time. Bitcoin gives you the opportunity to prepare for this.
Bitcoin maintenance reserves are a long-term treasury management strategy for real estate investors, outside of the uncertainty of the inflationary fiat system. Source.
You can use various bitcoin-only service providers to buy bitcoin using rental income. In Europe, there are companies like Relai and Bitcoin Reserve, for example. In the U.S., you can use Swan Bitcoin and in Canada, Bull Bitcoin. I have personally had positive experiences with Relai. I have not used the other companies mentioned, but have heard good feedback from others.
However, you need to build and manage your bitcoin treasury with care. Bitcoin is very volatile. It's important to only convert part of your rental income into bitcoin (perhaps 5% to 20%) so that there are always enough liquid reserves to be able to service ongoing maintenance costs and outstanding debts.
Bitcoin maintenance reserves are a long-term treasury management strategy outside of the current uncertainty of the traditional banking system. I'm fed up with the behavior of most banks. Their services and opinions change with central bank interest rates (which change arbitrarily).
Building a bitcoin treasury protects against bad decisions by central banks and gives real estate investors the opportunity to become more independent. When stored in cold storage, those bitcoin are the holder’s alone and are not at risk of default due to the actions of third parties, including banks and exchanges, or rising monetary inflation and arbitrary central bank decisions.
I want to point out that you have to act sensibly and not take unnecessary risks. Bitcoin speculation can “break your neck.” You likely must be able to wait five to 10 years before using bitcoin reserves in order to benefit from bitcoin's long-term price appreciation.
It is also of importance to note whether a property is privately owned or owned through a company, as this can have tax implications for owning and selling bitcoin. Discussing this in detail is beyond the scope of this article. You can talk to a tax advisor you trust or actively seek one who is knowledgeable about bitcoin and its tax implications.
If you decide to get started with Bitcoin, start slowly and increase your commitment over time as you gain confidence. In the beginning, the whole process can be overwhelming. Don't let that discourage you.
Three: Sell Real Estate To Buy Bitcoin
If you own multiple properties and have already paid off a significant portion of the debt you incurred to purchase or build those properties and understand that bitcoin is a better store of value, which means it will generate higher returns than real estate in the future, it can make sense to sell real estate to buy bitcoin. This must be assessed on a case-by-case basis.
For example, I work for a relatively-young real estate company. The completed properties are still highly indebted. It would be too risky to trade the security that the company has from the proceeds of a completed property to pay off its debt for bitcoin's volatile price appreciation.
However, if you are in a position where your real estate is not highly indebted, this strategy allows you to use bitcoin as a diversifier to protect part of your wealth from the threat of war, destruction, taxation or confiscation by a totalitarian government and participate in bitcoin’s exponential price appreciation, which will most likely outperform any real estate investment over time.
Based on my observations of Saylor and how he managed to make MicroStrategy the company with the largest bitcoin reserves in the world in the shortest amount of time, there's a much more viable strategy I've found for enabling real estate investors to buy bitcoin at scale. Namely, taking on debt against real estate as collateral to buy bitcoin.
Four: Leverage The Value Of Real Estate Into Bitcoin
Software intelligence firm MicroStrategy famously borrowed to buy bitcoin. The firm uses its business income to pay off the debt while holding bitcoin for the long term, participating in bitcoin's exponential appreciation in value over time. The company now holds over 150,000 bitcoin.
Real estate investors are experts at raising outside capital, usually for the purchase and development of new properties. Using existing real estate to incur debt and buy bitcoin may be an even bigger business opportunity though, as the value of bitcoin is likely to grow significantly faster than real estate over the long term. Thus, a higher return may be achieved. Fully-rented properties are the perfect collateral for borrowing to buy bitcoin, as the rent generates cash flow. Therefore, bitcoin never has to be sold to pay off debts. Instead, the rental income can be used to do so. Since the loan is repaid with the rental income, bitcoin's volatility is secondary.
Anyone who is uncomfortable going into debt to buy bitcoin can use a small part of their real estate portfolio (2% to 5%) for such a project. So, the risk is relatively low, but you still participate in the upside potential of bitcoin. By now, the Bitcoin network is so strong that the risk of not buying bitcoin is greater than the risk of buying bitcoin, as Greg Foss so often points out.
By taking on debt, you also don't jeopardize your core business if Bitcoin should fail (for whatever reason), since you can pay off the debt over time with rental income. As long as there is enough rental income to meet existing obligations, including the interest on an initial construction loan and the provision for any costs that may arise (maintenance, renovation, legal, taxes, etc.), you are not taking on any unnecessary additional risk.
The more comfortable you feel, the higher the debt ratio can be. It's entirely up to the individual. As Pierre Richard explained in his 2014 article “Speculative Attack,” borrowing to buy bitcoin is a phenomenal business opportunity. If there is enough cash flow to pay off operating debt (plus maintenance costs in the case of real estate) and bitcoin's value is rising faster than interest rates, which I think is likely to be the case for decades to come, then it is a no-brainer, possibly the greatest business opportunity of our lives.
While this is the most viable strategy for accumulating bitcoin with real estate you own, it is also the most difficult. Due to the macroeconomic and geopolitical uncertainties, in my personal experience, banks are currently very reluctant to lend, specifically for buying an asset like bitcoin, which they likely don't understand. But it's worth telling banks you work with about the idea, as bull markets may see them willing to accept real estate as collateral for loans to buy bitcoin.
Liquidity
Sensibly using real estate as collateral to borrow and buy bitcoin may solve another problem: liquidity. Real estate is an illiquid and immovable asset. Using immovable liquidity in income-generating real estate to buy bitcoin can be a good option to protect wealth from destruction or confiscation, should one need to relocate.
Creditworthiness
Finally, real estate development depends heavily on the ability to build creditworthiness. Bitcoin is pristine collateral for lending and will potentially help to build creditworthiness over time. Due to the limited supply of bitcoin, an increase in adoption is accompanied by an increase in price. For a real estate developer, this means that the more bitcoin you own, the more collateral there is to build credit and fund real estate construction in the future.
Bitcoin-Denominated Cash Flow
Bitcoin mining could be considered a bitcoin-denominated revenue stream, similar to real estate rental income (as pointed out by Dr. Bitcoin in a recent conversation we had). This should, in the long term, attract real estate investors to Bitcoin mining as it reflects the realities of the real estate business. However, it is beyond the scope of this article to go into detail about this.
Bitcoin And Real Estate Go Hand In Hand
In summary, the characteristics of bitcoin reflect many of real estate’s value propositions, on top of offering more fundamentally-secure custody, easier maintenance, a fixed supply cap and, most importantly, the ability to liquidate or take your wealth with you if necessary. Bitcoin is the ideal store of value: secure, digital, difficult to confiscate or tax and virtually impossible to destroy.
Real estate also has its advantages, namely cash flow and the possibility of calculated leverage. Which is why it is so particularly interesting for bitcoin accumulation.
Bitcoin and real estate go hand in hand. One is an illiquid but physical income-generating asset and the other is a highly liquid, digital asset. You can sell real estate to buy bitcoin if you think it's a good deal. If one chooses to keep a property, the rental income can be used to accumulate bitcoin, which in my opinion is great money for building long-term maintenance reserves.
We're living in a transitional period, so it's great to take advantage of real estate investment incentive structures while also considering bitcoin's asymmetric risk-reward potential. From my experience, real estate is the perfect collateral to borrow to buy bitcoin as the rental income can be used to pay off the debt. Whichever bitcoin strategy you choose, as a real estate investor you should decide how you want to take advantage of the opportunities that real estate offers in combination with Bitcoin. It may be a long time before the wealthy start parking their net worths into bitcoin instead of real estate. However, in my view, this is a great opportunity to get involved with bitcoin to position yourself in this early phase of the digitization of property.
Bitcoin's benefits as a store of value are not meant to dismiss the real estate development business. I'm not asking you to stop developing real estate, I'm asking you to add a Bitcoin strategy and, by doing so, to help build a financial system where access to property, the ability to store value and build wealth are accessible to everyone. Monetary inflation has made real estate so expensive that it is unaffordable to many and with that, the ability to build wealth is out of reach. As digital real estate, bitcoin will create a financial system that will be far more accessible than it is today. This will enable greater productivity and efficiency in the global economy.
This is a guest post by Leon Wankum. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.