Enhancing Creditworthiness with Bitcoin in a Debt-Intensive Economy
Since US President Richard Nixon announced in 1971 that the US dollar would no longer be convertible into gold at a fixed rate, central banks around the world have started operating a fiat-based monetary system with floating exchange rates and no currency standard. As a result, the money supply worldwide has increased exponentially and most industries now rely on credit to finance their operations and growth.
With the anticipated further devaluation of fiat currencies, driven by nation states needing to produce additional currency to cope with high borrowing costs, the creditworthiness of companies across all sectors is becoming increasingly important. This is particularly true for the real estate sector, which is extremely debt-intensive. In this context, bitcoin can play a crucial role as a disinflationary money, meaning its inflation rate decreases over time, providing an appreciating capital base that can help mitigate the risks associated with fiat currency devaluation and enhance a real estate company's creditworthiness. In the following I will explain why bitcoin should be integrated into real estate development financing, illustrating how to integrate bitcoin into real estate investment from the start.
Why Bitcoin Should Be Integrated into Real Estate Development Financing
Real estate has been widely used as an inflation hedge since the inflationary policies following the Nixon shock in 1971, closely tracking the growth of the US money supply M2. Consequently, real estate has accrued a substantial monetary premium, indicative of the collective confidence in its ability to serve as a reliable store of value, a function traditionally associated with money, that is no longer possible due to decades of monetary inflation that has decimated fiat money's purchasing power. However, with the rise of bitcoin, a near-perfect digital alternative, 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. Bitcoin offers an alternative that is easier to access and cheaper to store and maintain.
Real estate investors can benefit greatly from integrating the purchase of bitcoin at the start of a development project by including it in project financing. This approach hedges against the scenario where real estate loses its monetary premium to bitcoin, due to bitcoin's superior qualities as a store of value.
Similarly, bitcoin competes with real estate by serving as a digitally accessible, globally usable, and pristine collateral for lending. The popularity of real estate investments stems not only from its use as a store of value but also from its common use as collateral in the traditional banking system.
We can therefore assume that bitcoin's increasing use as collateral, due to its accessibility and user-friendly nature for both borrowers and lenders, will negatively impact the use of real estate in this capacity. As more people recognize bitcoin's advantages as collateral, real estate may see a decline in use for this purpose, while bitcoin's importance as a type of collateral grows.
It is therefore important to integrate bitcoin into real estate development from the start, ensuring that investors are well-positioned to capitalize on bitcoin's growing role in the financial landscape and its impact on real estate’s valuation.
My proposition is to integrate the purchase of bitcoin into real estate development financing. Allocating a portion of a loan, let's say 10%, to purchase bitcoin enables real estate developers to hedge against the risk of real estate losing its status as humanity's primary store of value. This strategy prepares real estate developers for a potential shift towards a Bitcoin standard, a hypothetical reality in which bitcoin becomes the world's main store of value and unit of account, and real estate may no longer dominate.
The Benefits of Integrating Bitcoin into Real Estate Development Financing
By incorporating the purchase of bitcoin into real estate development financing and holding the bitcoin within the same legal entity that holds the property titles, developers can capture the monetary premium that flows from real estate into bitcoin, hedge against monetary inflation, and build resilience and creditworthiness over time. This ensures the ongoing viability of their business operations while leveraging the benefits of both asset classes: bitcoin's price appreciation and real estate's cash flow.
Integrating bitcoin into real estate financing can also help facilitate a smoother and more productive transition onto a Bitcoin standard where the value of real estate is expected to be based on its utility, as people can save in bitcoin by default rather than having to invest in real estate to protect their purchasing power. Additionally, this approach can help developers gain more independence from the inflationary fiat system, which is making it increasingly difficult to beat inflation and remain profitable.
Inflation severely devalues fiat currencies and erodes purchasing power. Initially, this scenario benefits the real estate sector as people invest in properties to outperform inflation, thus increasing its nominal value. Besides, inflation decreases the real cost of debt incurred to develop or purchase real estate over time, temporarily benefiting property owners. However, in the long term, inflation negatively affects the real estate industry due to soaring construction and maintenance costs, and the diminishing value of income generated from properties.
This dual impact underscores the need for an alternative strategy, such as incorporating bitcoin into credit products to hedge against the negative consequences of inflation. An ideal scenario for integrating bitcoin into real estate development would involve a financial service provider offering traditional financing supplemented with a portion of bitcoin in the loan. By incorporating the purchase of bitcoin into credit lines, businesses can not only survive but also thrive in an inflationary environment.
This approach benefits the borrower by providing a hedge against inflation but also offers the lender additional security through the inclusion of a disinflationary digital asset, bitcoin, as collateral.
I will now provide an example of such a loan.
Example Real Estate Development Loan Enhanced with Bitcoin
Let's imagine a bank financing a $10 million real estate development project. The bank could extend the loan to $11 million and require the 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 for the borrower:
- It protects against the erosion of the monetary premium traditionally associated with real estate by the growing importance of bitcoin, a near-perfect digital store of value.
- It provides a safeguard against the perils of monetary inflation.
- It allows a company to build a novel capital base through the increase in value of bitcoin, which can be used to finance maintenance, further construction or other development projects.
- By owning bitcoin, particularly in the debt-intensive real estate sector, the credit rating of a company improves over time.
- Bitcoin, as an absolutely scarce and decentralized asset, exists outside the inflationary fiat system, offering stability during times of economic instability. In chaotic conditions, its limited supply and independence from central banks make its value proposition more apparent, acting as a hedge against financial collapse and strengthening the market from within.
- The borrower should ideally retain possession of the bitcoin for the long term and continuously, even after the loan is repaid. This serves as a hedge against property confiscation.
- Repeat the process with a new construction project while lending against the held bitcoin and potentially acquire more bitcoin through a new project financing, to continuously ensure the financial stability and growth of your business.
Including the purchase of bitcoin in a credit line also holds significant advantages for the lender. In the event of a project's failure and subsequent property liquidation, both the lender and, depending on the agreement, ideally also the borrower, are left with an asset: bitcoin.
This principle is not limited to the real estate sector but is applicable to all industries. I can therefore imagine bitcoin becoming an integral part of credit products, specifically to hedge against loan defaults.
If bitcoin is properly secured, its purchasing power will continue to increase even in the event of a loan default. Bitcoin safeguards lenders and potentially borrowers in the event of a borrower's failure to repay, provided that the borrower also holds custody of the bitcoin.
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 non-payment. Bitcoin's high liquidity considerably accelerates and reduces the expense of this process compared to a property. Once financial institutions understand that they can use bitcoin in this manner, it will undoubtedly become a fundamental component of lending solutions
Managing bitcoin custody properly is crucial. Consider multisignature setups or multi-custodial solutions to ensure security and control. For lending purposes, non-custodial solutions are emerging as a secure method for handling funds. Multisignature wallets, which require multiple signers to move funds, offer a significant advantage by allowing both lenders and borrowers to share custody. This collaborative approach enhances security and trust, as it provides oversight and control to all parties involved. It ensures that funds can only be accessed with the agreement of a majority of all authorized signers, reducing the risk of loss, theft, misuse, or mismanagement.
Conclusion
Including the purchase of bitcoin as part of a credit line generally increases the security of a loan structure, benefiting both borrowers and lenders. Bitcoin can be integrated relatively easily into the structure of real estate development financing. It presents a compelling narrative that challenges traditional views on real estate but offers an innovative solution to growing concerns about inflation and the rising costs of construction and maintenance.
The integration of bitcoin into financing is in its nascent stages, with no known products specifically tailored for real estate development. Nevertheless, the possibilities are vast and promising. This type of product will likely emerge from an innovative company that recognizes the potential of incorporating bitcoin into lending products. Traditional financial institutions are likely to be the last to recognize and seize this opportunity because of their reliance on established systems and regulatory constraints.
The dynamics described are prevalent in most industries, including real estate, banking and finance, energy, manufacturing, retail, healthcare, technology, aviation, mobility, food and beverages, and many others. Consequently, the integration of bitcoin into credit products would be beneficial to most industries, making it conceivable that bitcoin will become an integral part of credit markets, especially to secure loans against default. This could bolster the resilience of market actors in the face of rising economic and geopolitical uncertainties.
By embracing bitcoin-backed credit products, we can usher in a new era of economic empowerment and stability, with the potential to lead to greater resilience and productivity in the global economy.
This is a guest post by Leon Wankum. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
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