Bitcoin’s Role as Collateral in Real Estate Development

Welcome to the 20th edition of The Bitcoin Newsletter,

The improved lending systems in the West over the past centuries enabled market participants to discover and realize the potential of their economic activity and generate additional productivity. Fiat money has distorted this system, as it has made assets used to store value and receive credit expensive and increasingly inaccessible.

Both functions, store of value and collateral, are closely linked. Why would a bank, or anyone else, accept collateral that loses value over the long term?

Bitcoin has the potential to create a healthy credit market and expand it around the globe. As an accessible digital store of value, bitcoin can create a financial system where owning collateral and using it for credit will be far more attainable than it is today. This can lead to greater productivity and efficiency in the global economy.

Bitcoin's potential as collateral encompasses various debt-intensive sectors such as real estate development, banking and finance, energy, manufacturing, and many others. Most industries rely on credit to fund their operations and growth. With the expected further devaluation of fiat currencies due to nation states needing to produce additional currency units to cope with high borrowing costs, the creditworthiness of companies across all industries is becoming increasingly important.

In this context, bitcoin emerges as a valuable long-term collateral option to enhance creditworthiness and facilitate ongoing borrowing for construction, production or maintenance purposes across all industries.

In this edition of The Bitcoin Newsletter, I will illuminate a pathway to include bitcoin in the financial framework of real estate development, marrying the two in a manner that could redefine real estate investment and asset management in the intersection of real estate and bitcoin.

This is a fascinating topic that is becoming increasingly important. Recently, I had the opportunity to discuss the topic with Marty Bent, Michael Tanguma, and Jesse Myers (aka Croesus) on the Onramp podcast (WATCH) and I look forward to exploring this with you and some of the great minds in the Bitcoin and real estate space going forward.

Best regards,

Leon

DEEP DIVE

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Bitcoin’s role as collateral in real estate development

My proposition is to integrate bitcoin into real estate development financing. Allocating a portion of a loan, let's say 10-15%, to purchase bitcoin enables real estate developers to hedge against the risk of real estate losing its status as humanities primary store of value, with the emergence of bitcoin as a near-perfect digital alternative that is easier to access and cheaper to store and maintain.

This strategy readies real estate developers for a potential shift towards a Bitcoin standard, where real estate may no longer dominate as the primary store of value, with bitcoin assuming this role. This is because people no longer have to invest in real estate to outperform inflation; they can simply save in bitcoin, a near-perfect form of money designed to increase in purchasing power over time.

Real estate has been thrust into the role of a store of value in the wake of inflationary monetary policies post-Nixon Shock in 1971. This can be seen from the fact that the increase in the US money supply M2 since 1971 has been almost parallel to the development of real estate prices. Based on the analysis of compound annual growth rates (CAGR) from 1971 to 2023 for the average sales price of houses in the U.S. and the U.S. money supply M2, there appears to be a clear correlation. Over this period, the money supply M2 has demonstrated a compound annual growth rate (CAGR) of 6.9%, closely mirroring the increase in housing prices, which have risen at a CAGR of 5.7%. Consequently, real estate has accrued a substantial monetary premium, indicative of the collective confidence in its ability to serve as a store of value, a function traditionally associated with money.

However, with the rise of bitcoin, there's potential for a shift. This gradual transition could diminish the monetary premium that real estate has historically enjoyed, redirecting it toward bitcoin over time.

By incorporating bitcoin into property financing, we can facilitate a smoother and more productive economic transition onto a Bitcoin standard, one that could enhance the quality of real estate development and contribute to preventing societal collapse amid a hyperinflation scenario.

Real estate markets are intricately linked to macroeconomic factors such as monetary policies, interest rates, and inflation. Historically, these markets have experienced cycles of boom and bust, influenced significantly by central banks' attempts to control inflation. While the specifics of these cycles may vary over time, the underlying dynamics of central bank decisions and financing costs remain constant factors driving real estate market trends.

Predicting market trends becomes intricate due to the multitude of factors involved, including government regulation, interest rates, credit expansion, and macroeconomic challenges inherent to the inflationary fiat system.

Contrarily, bitcoin is less affected by the problems of the traditional fiat-based financial system than real estate, because it operates independently of the system.

Factors such as interest rates, central bank decisions, and governmental actions have limited influence on its valuation long term.

Bitcoin's pricing dynamics are instead dictated by its controlled supply, predetermined issuance schedule, and growing adoption. Nonetheless, it's crucial to recognize that bitcoin does not exist in a vacuum. It can still feel the effects of wider macroeconomic and geopolitical shifts, though these influences are usually short-lived and do not detract from bitcoin's foundational characteristics.

Owning bitcoin can therefore help market participants to build independence of the inflationary fiat system, which is making it increasingly difficult to outperform the rate of monetary inflation and remain profitable.

This allows companies in all sectors, but particularly in debt-intensive sectors such as real estate development, to be less affected by the negative consequences of currency devaluation, which leads to increasing construction and maintenance costs.

Adding bitcoin into credit products will enable market actors and their businesses to survive and thrive under an inflationary environment and even survive a possible collapse of the fiat-based banking system. This is a hedge against financial collapse and strengthens the market from within. An ideal scenario for incorporating bitcoin into financing would involve a bank offering traditional financing supplemented with a portion of bitcoin in the loan. Below, I will provide an example of such a loan.

Example real estate development loan enhanced with bitcoin

Let's imagine a bank financing a real estate development project worth $10 million. The bank could require the real estate developer to purchase bitcoin for an additional $1 million, bringing the total loan amount to $11 million (with 91% intended for real estate development and 9% for bitcoin acquisition).

This strategy serves as a hedge against several key risks:

1. It protects against the erosion of the monetary premium traditionally associated with real estate by the growing importance of bitcoin, a near-perfect store of value.
2. It provides a safeguard against the perils of hyperinflation and a potential banking collapse.
3. By integrating bitcoin as collateral for lending, particularly in the inherently debt-intensive real estate sector, the credit rating of the development company improves over time. This setup allows the entity to accumulate a capital base through the appreciation of bitcoin, which can be leveraged to fund maintenance, further construction, or other development endeavors.
4. The borrower should ideally retain possession of the bitcoin for the long term and continuously, even after the loan is repaid.
5. Repeat the process with a new construction project while lending against the held bitcoin and potentially acquire more bitcoin through a new project financing.

In the event of a real estate development project's failure and a subsequent property liquidation, both the lender and, depending on the agreement, potentially the borrower, are left with an asset: bitcoin. This serves as a hedge against complete loss of the loan.

If bitcoin is properly secured, its purchasing power will continue to increase even in the event of a company going bankrupt. Bitcoin not only shields borrowers from the risks of hyperinflation but also safeguards lenders in the event of borrower default.

However, including bitcoin in a loan not only acts as an effective hedge against default but also offers the advantage of swift and cost-effective liquidation in the event of a loan default. Bitcoin's high liquidity considerably accelerates and reduces the expense of this process compared to a real estate development project.

Using bitcoin as collateral generally increases the security of a loan structure, benefiting both borrowers and lenders.

For lending purposes, non-custodial solutions are emerging as a secure method for handling funds. Multisignature wallets, which require more than one signer to move funds, offer a crucial advantage by allowing lenders and borrowers to share custody and access to funds. This collaborative approach enhances security and trust, as both parties have oversight and control. It ensures that funds can only be accessed with the agreement of a majority of all signers, reducing the risk of misuse or mismanagement.

Bitcoin is relatively easy to integrate into the fabric of real estate financing. It presents a compelling narrative that challenges the traditional view of real estate financing and offers an innovative solution to growing concerns about inflation, the growing cost of construction and maintenance.

The addition of bitcoin into credit products has the potential to transform the real estate market, providing a hedge against hyperinflation, macroeconomic challenges, and societal collapse.

The described dynamics are prevalent across most industries. This strategy can therefore be applied to credit products in general. It is conceivable that bitcoin will become an integral part of credit markets. In particular to safeguard a loan against default.  This could bolster the resilience of market actors in the face of economic and geopolitical uncertainties.

By embracing bitcoin-backed financial products, we can usher in a new era of economic empowerment and stability. The journey towards integrating bitcoin into real estate financing is just beginning, but the possibilities it presents are vast and promising for the future of the industry.

WORTH TO KNOW

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**Podcast and publications

Onramp podcast: The Last Trade E046: Bitcoin Fixes Real Estate with Leon Wankum**
Recently I had the pleasure of joining Michael Tanguma, Marty Bent, and Jesse Myers (aka Croesus) on the Onramp podcast to discuss how Bitcoin-based financial products can fix the massive current debt problem in commercial and residential real estate and its role in real estate development. WATCHTFTC.io: How Bitcoin Will Transform Real Estate Investment with Leon WankumTFTC has published a summary article about the podcast I recorded with Onramp. READ

IDEAS OF INTEREST

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The Future of Bitcoin Borrowing and Lending w/ Max Kei (BTC177) - An Insightful podcast where Preston Pysh and Max Kei, the founder of Debifi, a non-custodial Bitcoin-based lending platform explore bitcoin's potential as pristine collateral for lending.WATCHBitcoin Will Power Up The Future Of Finance | Andrew Hohns - Marty Bent recently sat down with Andrew Hohns, founder of Batter Finance - a Bitcoin-based lending entity dedicated to assisting real estate owners in refinancing their properties to purchase bitcoin - to discuss how Bitcoin is transforming the financial landscape. WATCH

How To Fix Knee Pain For Life! ft. Kneesovertoesguy - Working, training and traveling a lot, as many Bitcoiners do, can be tiring on the body, mind and soul. Lately I've been doing a lot of things besides training that help me stay healthy and fit. This video is specifically about achieving and maintaining healthy knees. WATCH

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ResourcesLeon A. Wankum - Why bitcoin is pristine collateral for lendingLeon A. Wankum - How bitcoin will make housing affordable

Leon A. Wankum - Why every real estate investor should own bitcoinWikipedia entry Nixon shock

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Photo Credit: Lunch atop a Skyscraper, 1932.

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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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