Bitcoin vs real estate: what is the better store of value?
Bitcoin and real estate are similar in many ways: hard, tangible, scarce. Scarcity has quite a lot to do with the value of things, which is why certain unique pieces of art are worth so much and why real estate in a densely populated area is more expensive than in a non-densely populated area (surferjim, 2020). Sure, real estate has a utility value because people pay rent to live in it or use it for production, but the value is primarily determined by the limited supply of building land. There are only “so many” properties to be built in prime locations. Private households, wealthy individuals, pension funds and institutions, typically invest a significant portion of their disposable cash in real estate, which has become the world’s most popular store of value. According to the consulting firm McKinsey, more than 67% of the world’s net wealth is stored in real estate (Endurance, 2021). The monetary premium that a property carries as a store of value accounts for up to ⅔ of its value. This is due to the increased demand for real estate after1971, when the US government decided that the dollar should be decoupled from gold. Money lost its function as a store of value. Real estate served as an asset for many to preserve their wealth
The horrors of inflation
On August 15, 1971, US President Richard Nixon announced that the United States would end the convertibility of the US dollar into gold. This decision became known as the “Nixon shock” and changed the cause of monetary history. Since then, monetary inflation rates have steadily increased, destroying the purchasing power of fiat money and depriving money of its function as a store of value. Since 1971, house prices have increased nearly 70 times. In addition, the value of real estate has been increased by bundling and commoditizing mortgage debt. Without this financial „wizardry“ real estate has increased in value almost on par with inflation (Cartier, 2022).
What really causes inflation? Here’s what prices since 1970 tell us. The shocking rise in the cost of living (Average house on line 2).
Bitcoin vs. real estate
Bitcoin’s appeal also stems from the fact that its supply is limited (Brown, 2014). There will never be more than 21,000,000 bitcoin. In this capacity, bitcoin competes with real estate. The properties associated with bitcoin make it an ideal store of value. The supply is finite, it is easily portable, divisible, durable, fungible, censorship-resistant and noncustodial. The reality is that real estate cannot compete with bitcoin as a store of value. Bitcoin is rarer, more liquid, easier to move and harder to confiscate. It can be sent anywhere in the world at almost no cost at the speed of light. Real estate, on the other hand, is easy to confiscate and very difficult to liquidate in times of crisis and can be destroyed, as was recently shown in Ukraine, for example. After the Russian invasion on February 24, 2022, many Ukrainians turned to bitcoin to protect their wealth, bring their money with them, accept transfers and donations, and meet daily needs (Sigalos, 2021). Real estate, on the other hand, had to be left behind. It is immobile, which creates a location dependency. Real estate is an illiquid and immovable asset. In German, real estate translates to “Immobilien,” which literally means “to be immobile”. You cannot take real estate with you. Buying and selling takes a long time and it requires intensive care to maintain and increase its value. You have to deal with rents, repairs and property management. In many cases local politics try to influence real estate, especially residential real estate. For example through rent caps. Commercial real estate is confronted with digital disruption due to e-commerce. If real estate is not properly cared for, its value will literally degrade over time. Bitcoin on the other hand provides the ultimate form of transferable value because it preserves the encapsulated wealth. If stored properly, its value will increase over time without high maintenance costs (Saylor, 2022).
Bitcoin is easily accessible and cheap to store. You can buy any amount large or small. You can buy the smallest denomination of a bitcoin, 1 satoshi (1/100,000,000 of a bitcoin) for as little as $0.0002123319. All you need to have is an internet or phone connection to buy bitcoin and a hardware wallet, which costs around $50, to store it safely. There are no or low taxes, depending on the jurisdiction you’re in. In Germany, for example, profits from bitcoin sales are tax-free after a holding period of 12 months. There is a property transfer tax when buying real estate and also an annual property tax if you own it, but not with bitcoin (for now at least). Real estate is easily taxed and difficult to move outside of one jurisdiction. Bitcoin cannot be arbitrarily taxed. It is seizure and censorship resistant outside of the domain of any one jurisdiction. It is difficult to steal and easy to transport (Interstellar, 2022). The high security level of bitcoin bears no relation to the low storage costs. In my opinion, this is one of Bitcoin’s most important innovations. Easy access to property and safe self-custody. If you own the private keys, the key to access your bitcoin wallet, only you own the bitcoin in the wallet. Bitcoin is property that truly belongs to you. All you need is to remember 12 words, the backup (seed-phrase) to restore your bitcoin wallet. You could escape a war zone, buy a new hardware-wallet wherever you are, type in 12 words and have access to your bitcoin. This is truly revolutionary. It brings property rights to over 8 billion people. Nothing can stop you from taking your bitcoin with you. You are not dependent on lengthy bureaucratic processes, as is the case with real estate, for example.
Collateral
There is another quality that real estate and bitcoin share in common. Their use as collateral.
Today, real estate is the most common type of collateral used by a borrower to secure the repayment of a loan to a lender. This practice is common with mortgages, personal loans, and business loans. Banks lend to people and institutions that own real estate. However, social issues are also associated with the use of real estate as the preferred form of collateral. It has created an exclusive financial system in which it has become increasingly difficult to build credit as real estate has become expensive and less accessible. As a result, it has become almost impossible for most people in the world to accumulate wealth, because the ability to borrow money is one of the foundations of building a business and thereby wealth.
Bitcoin serves as prime collateral. Storage is pretty simple, there is no daily maintenance. Bitcoin just needs to be kept safe from cyber attacks. A financial service provider can set up its own cold wallet (a device that stores cryptocurrency offline) and protect its bitcoin from the threat of theft. Bitcoin can also be stored in a multisignature wallet. A digital wallet that requires more than one key to sign and authorise a transaction. This allows both lenders and borrowers to manage funds together and protects borrowers from the risk of bankruptcy of the lender. In this case, the borrower would otherwise lose their coins. With Bitcoin, the maintenance of the collateral also decreases. Banks usually have a large number of appraisers and auditors who continuously evaluate the collateral deposited. The valuation of real estate is particularly time-consuming. There are standards according to which real estate is valued. But these are constantly changing and properties must be valued individually based on location and condition. Bitcoin, on the other hand, has a real-time market price that is accessible to everyone on the internet.
Digital vs. physical property
Bitcoin is digital property and therefore superior to real estate, which has physical limitations. Digital property has a much higher velocity than physical property. It can be used anywhere in the world at any time. You could live in Berlin but get a loan from a bank in Singapore with your bitcoin. Bitcoin allows for much easier access to credit. Overall, bitcoin‘s excellent properties make it the ideal type of collateral for both borrowers and lenders. Bitcoin lending services will reduce the incentive for anyone to ever sell, which of course will have a positive impact on the price (Farrington, Meyers, “Bitcoin Is Venice,” page 16). On a bitcoin standard, saving would be rewarded and people would have to borrow less, but the need to borrow money remains. Fair access to it is important as it is one of the foundations of building a business and innovation. Bitcoin enables an easily accessible financial system. Attempts to make real estate more accessible have failed, with second tier real estate investments such as real estate investment trusts (REITs) falling short of actually holding the asset, among other reasons, because this involves an additional counter-party risk. This should not distract from the profitable business of real estate development. However, this is far too capital intensive and complicated for the average person looking to store value and build wealth.
In conclusion, bitcoin’s excellent properties make it an ideal technology to store value and build wealth. It serves that purpose much better than real estate. This will most likely lead to bitcoin (digital property) replacing real estate (physical property) as the preferred store of value, just as email has replaced the postal service as the preferred way of sending and exchanging information. This can result in two things: First, real estate could lose the monetary premium of being used as a store of value, which then flows into bitcoin. Second, bitcoin’s return will likely be many times greater than real estate. Because bitcoin is just at the beginning of its adoption cycle. Today there are roughly 4 million out of 8 billion people on earth that own 0.1 bitcoin. The 4 million are only 0.05% of the world’s population at most (Croesus_BTC, 2022). The value of all real estate in the world reached $326.5 trillion in 2020 (Tostevin, 2021). In comparison, the value of all bitcoin ever mined pales in at roughly $400 billion. That’s just 0.12% of the value of global real estate. In summary, bitcoin is vastly superior to real estate as a store of value and there is a substantial growth ahead for bitcoin when compared to the market capitalisation of real estate.
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Other resources
For an in-depth comparison of bitcoin and real estate, you can find articles of mine on the Bitcoin Magazine website.
“Why bitcoin is digital real estate” available at https://bitcoinmagazine.com/business/why-bitcoin-is-digital-real-estate
“Why bitcoin is pristine collateral for lending” available at https://bitcoinmagazine.com/business/why-bitcoin-is-pristine-collateral
“Why every real estate investor should own bitcoin” available at https://bitcoinmagazine.com/business/every-real-estate-investor-should-own-bitcoin
This article incorporates part of an article I published in Bitcoin Magazine on the 29th of November 2022, titled „Why Bitcoin Is The Ultimate Wealth Preservation Technology“. I wanted to build on that and go into detail because the topic is so multifaceted.
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