Balancing Bricks and Bytes: The Evolving Role of Real Estate and Bitcoin in Wealth Creation

In the last half-century, real estate has proven to be an effective store of value, with property prices worldwide rising significantly since the 1970s. This period coincides with the "Nixon shock" of August 15, 1971, when U.S. President Richard Nixon announced the end of the U.S. dollar's convertibility into gold. 

Since then, central banks globally have operated on a fiat-based monetary system with floating exchange rates and no fixed currency standard. Consequently, the money supply has steadily increased. Real estate has become so valuable because it serves the world as the primary asset to store value and protect wealth from the resulting inflation, holding approximately 67% of global wealth, estimated at around $330 trillion.

1) Bitcoin = the protocol and payment network

2) bitcoin = the currency
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Digital Store of Value

The introduction of Bitcoin in 2009 disrupted real estate's role as a store of value. Digitisation optimises almost all value-preserving functions. Bitcoin is rarer, cheaper to maintain, easier to access, more liquid, easier to move and harder to confiscate, destroy or tax. With its exceptional features, bitcoin is likely to absorb a significant portion of the monetary premium that real estate has accrued over the years. This shift could potentially bring housing prices closer to their utility value, making housing more affordable but posing challenges for real estate investors.

Particularly, Millennials and Generation Z, who have been priced out of real estate, are inclined to adopt bitcoin as their preferred store of value. Studies show a growing percentage of Millennials and Gen Z owning cryptocurrencies, with bitcoin being the most trusted option for long-term savings. Moreover, recent economic developments have added complexity to the real estate industry. Real estate heavily relies on debt for construction and purchases, making rising interest rates a concern. Higher interest rates increase costs and reduce affordability (since fewer people can afford financing), leading to decreased demand for real estate and lower prices.

Inflation has significantly increased construction costs in recent years and political calls for rent caps to make housing affordable may inadvertently reduce the incentive for companies to provide housing, because it’s production becomes unprofitable. Further exacerbating housing shortages. Environmental, Social, and Governance (ESG) requirements also contribute to rising maintenance costs for real estate.

In this context, integrating Bitcoin strategies can enhance the competitiveness of real estate investors. Due to its limited supply and excellent monetary properties, bitcoin's purchasing power increases in the long term as demand increases. Making it a useful tool to withstand the inflationary pressures of the fiat system, protect against the potential adoption of bitcoin as a store of value, and secure the accumulated monetary premium in real estate.

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Bitcoin Strategies for Real Estate Investors

1. Maintenance Reserves: Bitcoin is an ideal asset for building maintenance reserves for long-term property ownership. It is disinflationary (which means that the inflation rate will decrease over time), preserving and increasing purchasing power, unlike fiat currencies suffering from monetary inflation. 
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2. Financing Integration: Utilising credit to purchase bitcoin alongside real estate projects can provide a hedge against property value fluctuations, inflation, and improve a company's financial position in the long term.
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3. Refinancing: Funds from refinancing in the event of an increase in the value of real estate can be used to build up bitcoin holdings. However, rising interest rates can complicate this strategy and can place an additional burden on a company. This strategy must be examined carefully on a case-by-case basis.
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4. Bitcoin as Collateral: Bitcoin serves as pristine collateral for lending, potentially improving a company's creditworthiness as more banks and financial institutions recognize its value. The properties of bitcoin reflect many of real estate’s value offers on top of fundamentally cheaper maintenance.
   As the adoption of Bitcoin and inflation in the fiat system progresses, it can be assumed that companies that hold bitcoin long-term will be viewed as more creditworthy in the future. 
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5. Tax Implications: Ownership and sale of bitcoin can have tax implications, so it's essential to consult a tax advisor knowledgeable about Bitcoin.
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6. Holding period: Because bitcoin is highly volatile, it's important to use only a portion of a company's treasury to buy bitcoin (5 - 10 % seems to be typical). This is not money that is needed to make payroll or pay vendors. A bitcoin stash is a long-term treasury management strategy outside of the traditional banking system’s current uncertainty. It is also ideal to have a holding horizon of 5-10 years as bitcoin appreciates in value over time.

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Bitcoin's potential

The potential of Bitcoin is vast. Likely significantly greater than that of real estate, which has already completed its adoption cycle as a store of value. Currently, the market capitalization of the real estate market is about 600 times larger than that of bitcoin. Although real estate is in competition with bitcoin, it will remain a valuable investment due to the leverage effect.

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Real estate under a Bitcoin standard

Even if real estate loses some of its monetary value to bitcoin, entrepreneurs can continue to earn rent by investing in building properties for rental. This represents an opportunity to take advantage of both real estate income and bitcoin's potential as a store of value.

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Conclusion

As a liquid digital store of value, bitcoin complements the real estate industry. The benefits of bitcoin do not diminish the value of real estate; instead, the two can coexist. Real estate is an income-producing asset (rent), while bitcoin is a highly liquid, digital asset. Getting started with Bitcoin may seem overwhelming, but it is a great opportunity to benefit from the transition to digital wealth storage.

The key is to begin gradually and increase your commitment to Bitcoin over time. This transitional period offers a chance to benefit from real estate investment incentive structures while considering bitcoin's asymmetric risk-reward potential.

Bitcoin's volatility should not distract from the opportunity it represents. Those who rejected the internet missed out on one of the greatest business opportunities of their lives. Those who reject Bitcoin will likely meet the same fate.

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About the author

Creative Entrepreneur. Interests include Real Estate, Bitcoin, Media & innovative Hi-Tech.
Twitter: @leonwankum

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Disclaimer: The views and information expressed in the guest contributions should not be interpreted as financial advice. It is important to note that Coinfinity does not necessarily represent the same positions and views as in the content provided here.