Bitcoin boosts creditworthiness in a debt-intensive economy
After U.S. President Richard Nixon announced in 1971 that the U.S. dollar could no longer be exchanged for gold at a fixed rate, central banks around the world Fiat-based monetary system Floating exchange rates and no monetary standard. As a result, the world’s money supply has grown exponentially and most industries now depend on credit to finance their operations and growth.
With countries being forced to issue additional currency and further devaluation of legal tender expected, Deal with it High borrowing costs make the creditworthiness of companies in all sectors increasingly important. This is especially true for the extremely debt-heavy real estate sector. In this context, Bitcoin can play an important role as a deinflationary currency, meaning that over time it will reduce inflation rates and increase the value of the capital base, helping to reduce the risks associated with the devaluation of fiat currencies and increase the creditworthiness of real estate companies. Below we explain why you should integrate Bitcoin into your real estate development financing and show you how to integrate Bitcoin into your real estate investments from the get-go.
Why Bitcoin Should Be Incorporated into Real Estate Development Financing
Real estate has been widely used as an inflation hedge since the inflationary policies following the Nixon Shock of 1971, and is closely tied to the growth of the U.S. money supply, M2.As a result, real estate has acquired a substantial monetary premium, a sign of collective confidence that real estate can act as a reliable store of value – a function traditionally associated with money but no longer possible as decades of monetary inflation have decimated the purchasing power of fiat currencies. However, with the rise of a near-perfect digital alternative, Bitcoin, a shift is possible. This gradual transition could reduce the monetary premium that real estate has historically enjoyed and steer it towards Bitcoin over time. Bitcoin offers an alternative that is easy to access and cheap to store and maintain..
Real estate investors can benefit greatly by incorporating Bitcoin purchases into their project financing at the start of a development project. This approach prepares them for a scenario in which real estate loses its monetary premium to Bitcoin as Bitcoin continues to be a better store of value.
Similarly, Bitcoin competes with real estate by being digitally accessible, usable globally, and acting as pure collateral for lending.The popularity of real estate investment is not just as a store of value; collateral In the traditional banking system.
It can therefore be surmised that the increased use of Bitcoin as collateral, due to its accessible and easy-to-use nature for both borrowers and lenders, will have a negative impact on the use of real estate for this purpose. As more people become aware of the benefits of Bitcoin as collateral, the use of real estate for this purpose may decrease, while Bitcoin’s importance as a form of collateral may increase.
It is therefore important to integrate Bitcoin into real estate developments from the start, ensuring investors are positioned to take advantage of Bitcoin’s expanding role in the financial industry and its impact on real estate valuations.
My suggestion is to incorporate Bitcoin purchases into the financing of real estate development. By dedicating a portion of the loan, say 10%, to buying Bitcoin, real estate developers can avoid the risk of losing real estate’s status as humanity’s primary store of value. This strategy will prepare them for the transition to the Bitcoin standard, a hypothetical reality in which Bitcoin becomes the world’s primary store of value and unit of account and real estate no longer dominates.
The Benefits of Incorporating Bitcoin into Real Estate Development Financing
By incorporating Bitcoin purchases into the financing of real estate development and holding Bitcoin within the same legal entity that holds the title to the real estate, developers can capture the monetary premium flowing from real estate to Bitcoin, hedge against monetary inflation, and build resilience and creditworthiness over time, ensuring the continued viability of their business operations while leveraging the benefits of both asset classes: Bitcoin price appreciation and real estate cash flows.
The incorporation of Bitcoin into real estate finance could also facilitate a smoother and more productive transition to the Bitcoin standard, where real estate is expected to be valued based on its utility. This is because people would no longer need to invest in real estate to protect their purchasing power, but would be able to save Bitcoin by default. Furthermore, this approach would allow developers to become more independent from inflationary fiat currency systems, which are becoming increasingly difficult to beat and remain profitable.
Inflation significantly devalues fiat currency, reducing its purchasing power. Initially, this scenario benefits the real estate sector, as people invest in real estate to earn above-inflation returns, increasing its nominal value. Additionally, inflation reduces the real cost of debt to develop and purchase real estate over time, temporarily benefiting real estate owners. However, in the long term, inflation negatively impacts the real estate industry due to higher construction and maintenance costs, as well as the reduced value of the income derived from real estate.
This dual impact highlights the need for alternative strategies such as incorporating Bitcoin into credit products to avoid the negative effects of inflation. An ideal scenario for incorporating Bitcoin into real estate developments would be a financial services provider offering traditional loans with a portion of the loan topped up with Bitcoin. By incorporating Bitcoin purchases into their lines of credit, businesses can not only survive but thrive in an inflationary environment.
This approach not only benefits borrowers by providing a hedge against inflation, but also provides additional security for lenders by including Bitcoin, an inflation-proof digital asset, as collateral.
Here is an example of such a loan.
Example of a Bitcoin-Powered Real Estate Development Loan
Let’s say a bank lends to a $10 million real estate development project. The bank extends the loan to $11 million and requires the developer to purchase another $1 million in Bitcoin, bringing the total loan to $11 million (91% for the real estate development and 9% for acquiring Bitcoin). This strategy acts as a hedge against several major risks for the borrower:
- This prevents the growing importance of Bitcoin, a near-perfect digital store of value, from eroding the monetary premium traditionally associated with real estate.
- It provides a safeguard against the dangers of currency inflation.
- This allows companies to build a new capital base through the increase in Bitcoin’s value, which can then be used to fund maintenance, further construction and other development projects.
- Especially in the debt-heavy real estate sector, owning Bitcoin can improve a company’s credit rating over time.
- As an absolutely scarce and decentralized asset, Bitcoin exists outside of an inflationary fiat system, providing stability in times of economic uncertainty. In times of chaos, its limited supply and independence from central banks makes its value proposition clearer, acting as a hedge against financial collapse and strengthening markets from the inside.
- Ideally, borrowers should continue to hold their Bitcoin for the long term after repaying the loan, which acts as a hedge against property confiscation.
- They will then repeat this process with new construction projects, lending against their own Bitcoin holdings, earning more Bitcoin through new project financing and ensuring the ongoing financial stability and growth of their business.
Including Bitcoin purchases in a line of credit also offers a major advantage to lenders: in the event of a project failure and subsequent liquidation of assets, both the lender and, depending on the contract, ideally the borrower, will be left with an asset: Bitcoin.
This principle applies not only to the real estate industry but to all industries, and therefore we can see Bitcoin becoming an integral part of credit products, especially to hedge against loan defaults.
If Bitcoin is properly secured, its purchasing power will continue to grow even in the event of a loan default: if a borrower is unable to repay, Bitcoin protects the lender and, potentially, the borrower, if the borrower also holds Bitcoin.
Including Bitcoin in a loan not only acts as an effective hedge against default, but also offers the advantage of quick and cost-effective liquidation if payment is not made. Bitcoin’s high liquidity significantly accelerates this process and reduces costs compared to real estate. Once financial institutions understand that Bitcoin can be used in this way, it will undoubtedly become a fundamental element of lending solutions.
Properly managing Bitcoin storage is crucial. Consider a multi-signature setup or multi-custody solution to ensure security and control. For lending purposes, non-custodial solutions have emerged as a secure way to handle funds. Multi-signature wallets, which require multiple signers to move funds, have the great advantage of allowing both lenders and borrowers to share custody. This collaborative approach enhances security and reliability as it provides oversight and control for all parties involved. This reduces the risk of loss, theft, misuse, or mismanagement as funds can only be accessed with the consent of a majority of all authorized signers.
Conclusion
Including Bitcoin purchases as part of a line of credit generally adds safety to the loan structure, benefiting both borrower and lender. Bitcoin can be relatively easily incorporated into real estate development financing structures. This presents a compelling narrative that challenges traditional thinking about real estate, while providing an innovative solution to growing concerns about inflation and rising construction and maintenance costs.
Bitcoin’s integration into finance is still in its early stages, and there are no known products specifically targeted at real estate development. However, the potential is great and promising. Products of this kind will likely emerge from innovative companies that recognize the potential of incorporating Bitcoin into lending products. Traditional financial institutions, relying on established systems and regulatory constraints, will likely be the last to recognize and seize this opportunity.
The described dynamics are prevalent across most industries, including real estate, banking and finance, energy, manufacturing, retail, healthcare, technology, aviation, mobility, and food and beverage. Therefore, the incorporation of Bitcoin into credit products would be beneficial for most industries, making Bitcoin an integral part of the credit market, especially as collateral for loans against defaults. This could strengthen the resilience of market participants in the face of growing economic and geopolitical uncertainties.
The adoption of Bitcoin-backed credit products could usher in a new era of economic strengthening and stability, leading to greater resilience and productivity in the global economy.
This is a guest post by Leon Wankum. The opinions expressed here are entirely Wankum’s own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
