Bitcoin’s Impact on Global Markets: Housing, Interest Rates, Lending, and Investments

We’ve finally hit $100K per bitcoin! This milestone solidifies bitcoin’s stance as the most important digital store of value.

As its market cap grows ($1.98T as of 7th of Dec.), bitcoin will have an increasingly significant impact on other market variables. This is only the beginning, and we’re already starting to see its influence take shape.

I’ve just returned from a trip to El Salvador. While there are trade-offs, it was inspiring to witness the positive impact Bitcoin is having on the world. Upon returning, I was excited to see the benefits of integrating bitcoin into loan structures gaining public momentum.

The fact that guests on CNBC are openly discussing bitcoin’s potential as pristine collateral for lending highlights how rapidly this asset has become better-understood. As its monetization progresses, bitcoin will continue to assert its influence as a disinflationary asset. While bonds, stocks, gold, art, and real estate will remain key players in shaping financial markets, bitcoin’s superior qualities as a store of value suggest it will complement, and potentially partially replace, other assets in this role. In particular real estate, which has become the world’s preferred way to store value.

In the 27th edition of The Bitcoin Newsletter, I will explore how bitcoin’s rise, and its potential to replace real estate as a form of money, could have far-reaching consequences for the global financial system and broader implications for society.

As a new variable in global markets, bitcoin is poised to drastically impact other market variables and prices, including housing, interest rates, lending, and investments, as it continues to grow.

I am welcoming any feedback on my outlook.

Best regards,

Leon

DEEP DIVE

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Bitcoin’s Impact on Global Markets: Housing, Interest Rates, Lending, and Investments

The positive potential of bitcoin's monetization becomes obvious when looking at housing. Traditionally, people owned real estate for its utility value, because it could be lived in or used for commercial activities. Today, however, it serves the world as the primary asset for storing value.

This development coincides with the "Nixon shock" of August 15, 1971, when U.S. President Richard Nixon announced that the U.S. would end the convertibility of the U.S. dollar into gold at a fixed rate. The money supply has been rising steadily ever since, forcing people to invest to outperform inflation. Real estate, due to its scarcity and favorable financing options, has become one of the most popular investments.

Source: Leon Wankum. Bitcoin and Real Estate (BTC Prague 2024 Keynote, 2024.

This shift has contributed to the significant increase in housing costs and elevated living expenses, as real estate has accrued a substantial monetary premium due to its role as a substitute for money. While real estate remains an important asset in shaping financial markets, bitcoin’s superior qualities as a store of value suggest it will accompany, and potentially partially replace, real estate in its role as money over time.

Housing on a Bitcoin Standard

Real estate is now recognized as one of the fundamental asset classes underpinning the global financial system. It is a commonly used form of collateral, supporting a wide range of financial activities, including lending, credit, and banking services. This, in turn, significantly influences interest rates and investment behavior. Real estate’s elevated status as a primary store of value has profound implications, influencing both economic stability and instability in today’s financial landscape.

Since the introduction of bitcoin in 2009, there has been sound money again, serving as a store of value by default. Bitcoin's near-perfect properties as money position it as a superior store of value to real estate, potentially enabling it to absorb a significant part of the monetary premium that real estate and other asset classes have accumulated since 1971.

Because of this, housing should become more affordable over time. Especially for those who hold bitcoin. But also since we can assume that people will prefer saving in bitcoin by default, rather than having to invest into real estate to outperform inflation.

Under a Bitcoin standard, the cost of building and labor is likely to decrease, allowing more resources to be allocated toward construction projects. As a result, we can hope for increased attention to detail, potentially leading to more beautiful architecture and higher-quality buildings, as more money is available for creative and aesthetic improvements.

Ultimately, we can always assume that a variety of assets, including bitcoin and real estate, will continue to be in demand, as individual preferences drive ongoing diversification in how people choose to store value and mitigate uncertainty, but we may see real estate gradually collapse to its utility value over time, with bitcoin increasingly replacing many of the functions that real estate has taken on in its role as money. This shift primarily includes its function as the world's preferred store of value and its widespread use as collateral.

Interest Rates Under a Bitcoin StandardIn a free market under sound money, the actual or market interest rate depends on various factors, in particular the supply and demand for capital. When the supply of capital exceeds demand, the market interest rate falls, while it rises when demand exceeds supply. The market interest rate is therefore the price at which capital is exchanged on the market.

We can assume that the interest rate would reflect the general time preference of people in the economy. Under a fiat standard, the “risk-free” interest rate is tied to inflation. A US Treasury bond with a yield of 4-5% would be considered “risk-free*”,* because the yield theoretically compensates for the loss of purchasing power caused by fiat currency inflation.

More importantly, the bond is typically viewed as “risk-free”, because traditional finance (TradFi) economists believe that the risk of a country defaulting is negligible, given that states can print money endlessly. However, it is an intellectual fallacy to believe in a truly “risk-free rate". While there are low-risk return components, nothing is entirely risk-free.

The concept of a “risk-free rate” itself embodies the way systemic issues are obscured through language, as it implies a certainty that does not exist. Under a Bitcoin standard, the lowest risk return refers to holding bitcoin in self-custody.

This risk is far less than the historical certainty that any fiat currency will eventually devalue or collapse, something often overlooked in the fiat market’s so-called “risk-free” interest rate.

When stored in cold storage, bitcoin remains the holder’s alone, safe from confiscation or inflation imposed by third parties. The rate of return for bitcoin is related directly to productivity. Since bitcoin is finite, the value of individual units increases as human productivity (stored in Bitcoin) grows.

There is a risk of not participating in the increment in the value of bitcoin (deflation) in the event of a loss, and this risk is significant, as bitcoin is designed to increase in purchasing power over time forever, provided humanity remains productive.

A greater productivity of the economy increases this risk. The interest rate on a loan would likely be the deflation rate plus a risk premium to compensate for potentially losing bitcoin.

Lending and Investing Under a Bitcoin StandardWith a finite money like bitcoin, there is no need to generate additional returns, as is the case with an inflationary fiat currency, where losses in purchasing power due to monetary devaluation must be offset.

Bitcoin's change in value would be related to economic output, with bitcoin's purchasing power adjusting to the economic climate. The price will adjust to expected productivity gains by rising, and will fall in line with expected losses, e.g., after natural disasters.

The incentive for someone to lend bitcoin will be considerably low because there is no benefit in potentially losing out on deflation without adequate compensation.

As a result, interest rates will likely be significantly higher and market participants will think carefully about lending and borrowing. The lender must consider the risk of a significant loss of purchasing power if the money is not paid back and will need to require sufficient collateral to protect against the risk of default, which would have harsher consequences in an environment with deflationary tendencies. The borrower must consider the interest to be paid and the difficulty of repayment due to the risk of deflation.

To a Keynesian economist, this scenario might seem like a deadlock for the economy. However, the presence of risk associated with taking out a loan can actually be beneficial. It can foster a healthier market environment and encourages greater innovation. By making it more difficult to fund ideas with no genuine demand, the system naturally filters out ventures that are uneconomical.

This dynamic discourages the emergence of so-called "zombie companies", businesses that lack financial sustainability and contribute little to innovation or value creation for society and investors. Their persistence in the market often leads to inefficient allocation of resources, stifling progress and economic growth. Under a Bitcoin standard, "zombie companies" take on a different definition. Unlike those on a fiat standard, they are companies that acquired bitcoin early and rely on its price appreciation without adding substantial value to the market. In contrast, on a fiat standard, zombie companies are typically those sustained by debt and cheap money, surviving without contributing meaningful innovation or value.

The key difference under a Bitcoin standard is that these companies cannot rely on bailouts through the creation of additional currency. Instead, they are compelled to spend their bitcoin reserves over time, imposing a natural limit on their longevity and encouraging a more efficient allocation of resources. Without a central authority to inflate the supply, bad decisions can't be cushioned, ensuring that even non-productive companies must either add value to the market or eventually face the consequences. As a result, there will most likely be fewer useless companies feeding on cheap money, of which there are numerous under a fiat standard.

And if these companies don't spend their bitcoin, they reduce the supply of outstanding bitcoin, benefiting everyone who holds it, as a tighter supply can make bitcoin more valuable with increasing demand. This dynamic can also incentivize more people to mine bitcoin, further strengthening the network's security.

As we can expect that people will increasingly shift to saving in bitcoin, demand for traditional financial products like ETFs, pension funds, life insurance, private equity, venture capital, and real estate investment loans would decrease, fundamentally changing how people save, invest, and buy homes. Much of the current financial infrastructure surrounding finance and real estate, including brokers, would become less important and may partially disappear, while Bitcoin-based financial services are expected to become more prominent.

Since bitcoin is especially cost-effective for managing large sums of money, it could significantly disrupt real estate, pension funds, private equity and wealth management in particular by reducing the need for wealth managers and their associated fees and management charges. Bitcoin can preserve large amounts of capital at a lower cost over time than anyone, regardless of personal investment choices, could. Life insurance companies may even develop new products centered around Bitcoin.

While capital markets, private equity, and venture capital will continue to play vital roles in providing capital for company growth, bitcoin introduces competition by serving as a new benchmark. Plus, as Bitcoin continues to evolve, we are likely to see a convergence of traditional finance and Bitcoin-based systems, likely creating a more intelligent financial ecosystem that blends the strengths of both.

Conclusion

Bitcoin is designed to function as a digital store of value, characterized by high mobility, liquidity and divisibility, making it easily accessible. As bitcoin’s role in the global financial system continues to expand, its unique characteristics are likely to increasingly shape both the financial landscape and human action. The rise of Bitcoin and its potential to accompany and eventually partially or totally replace not just real estate, but all assets that have assumed the role of money under the inflationary fiat system, could have far-reaching consequences for the global financial system and broader implications for society.

It will certainly be fascinating to see how bitcoin finds its place within different asset classes and the financial system, whether as money, a long-term store of value, collateral, or even backing certain bonds or real estate funds. We're already beginning to see TradFi embrace Bitcoin, with real estate funds announcing plans to use bitcoin to build maintenance reserves and debt funds integrating bitcoin into their practices.
WORTH TO KNOW

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Podcast and publicationsEven though the following sources of mine have been mentioned before, they remain highly relevant and worth reading. Therefore, I will share them with you again, particularly in light of the upcoming developments in the areas of Bitcoin, finance, real estate, and lending

Leon Wankum: Why Bitcoin is Pristine Collateral for LendingThis article, written over two years ago, delves into bitcoin’s unique qualities as pristine collateral for lending. It explains in detail why bitcoin’s characteristics make it an ideal asset to back loans and highlights the potential positive impacts this could have on the broader financial system. Although markets often take time to recognize such advancements, the insights presented here remain highly relevant. READ
Leon Wankum: Bitcoin and Real Estate (BTC Prague 2024 Keynote)
In this keynote presentation delivered in Prague, I condensed three years of research on the intersection of Bitcoin and real estate. The talk addresses critical questions: Why is real estate so valuable? How could bitcoin become a competitive investment alternative to real estate? And how can real estate investors benefit from incorporating Bitcoin into their strategies? WATCH

Leon Wankum: How Bitcoin Will Make Housing Affordable
This article explores how bitcoin, as a near-perfect store of value, could make housing more affordable over time. First, by holding bitcoin, individuals can benefit from its superior purchasing power growth, which historically outpaces real estate price increases and inflation. Second, bitcoin allows people to save by default without needing to invest in real estate to hedge against inflation. Over time, as fewer people view real estate as a necessary investment, property values may collapse closer to their utility value, making housing more accessible. READ

Leon Wankum: How Bitcoin Uses EnergyThis article explains how Bitcoin utilizes energy to operate successfully as a sovereign network. The resolution of this challenge, known in computer science as the Byzantine Generals Problem, through the implementation of the Proof-of-Work algorithm, stands as one of Satoshi’s most remarkable innovations. READ

IDEAS OF INTEREST

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Joe Rogan Experience #2223 with Elon Musk
Even though, as a Bitcoiner, I followed the US election and the enthusiasm of many public Bitcoiners with great skepticism, the media's hunt against people who "think differently" is very worrying. Ludvig von Mises said that true freedom means accepting the opinion of another with which you disagree. It seems as if there are forces at work that want to transform the Western world into a space where people who think differently are demonized rather than heard. Elon Musk brings this across well in this episode. And while I disagree with many things that Elon Musk says or does, he has given a voice to people who think differently by buying Twitter (X) and making it a space for open discussion and expression of opinion. The free world can be grateful to him for that. LISTEN

Arthur Hayes: Black or White ?
In this edition of Hayes' newsletter, he takes us on a journey that reveals how American capitalism is not truly capitalism, but rather an interpretation of it. It has more socialist and protectionist elements than it openly acknowledges. In particular, the function and role of the fiat system and government bonds are examined. Thanks to Ijoma Mangold for the excellent recommendation. READ

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Resources

Leon Wankum - Why Bitcoin is Pristine Collateral for Lending READ Leon Wankum - Bitcoin and Real Estate (BTC Prague 2024 Keynote) WATCH
Leon Wankum - How Bitcoin Will Make Housing Affordable READ
Leon Wankum - How Bitcoin Uses Energy READ

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Photo Credit: andrewprokos.com

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Disclaimer: the content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Make sure you do your own research before making any investment and be aware of your own risk tolerance. If you like to build on my thoughts, feel free, but please cite me as the source. 2024 - Leon A. Wankum. 

Editing and content creation by Clemens Haidinger.

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