Introduction
Traditionally, real estate has been valued for its utility as a place to live or use for production. However, in today’s world, it serves as a primary asset for storing value. This shift is a result of decades of monetary inflation that has eroded purchasing power. This change in perception coincided with the “Nixon shock” of 1971 when the US ended the convertibility of the dollar into gold, leading to a fiat-based monetary system with floating exchange rates. As a result, real estate has become the primary store of wealth, with approximately 67% of global wealth stored in this asset. Bitcoin, introduced in 2009, offers sound money and a store of value that could potentially replace real estate as the primary asset.
Housing, Interest Rates, and Lending
Real estate is commonly used as collateral in the banking system and has a significant impact on lending. However, under a Bitcoin standard, bitcoin’s properties make it an attractive alternative to real estate as collateral. Bitcoin’s properties, combined with secure custody and easy accessibility, make it a pristine collateral option. There is already a growing emergence of Bitcoin lending products, indicating the potential for bitcoin to replace real estate as an essential asset in the global financial system. Such a shift would lead to fundamental changes in the cost of housing, lending, and interest rates.
Utility Value of Housing Under a Bitcoin Standard
Under a Bitcoin standard, the utility value of housing would be determined by supply and demand, just like any other good in the market. The cost of housing would be based on the highest utility an individual derives from the amount of money they spend on housing. Personal preferences, location, and individual financialization percentages would influence the decision to build, buy, or rent a property. With bitcoin as a default store of value, financialization would likely decrease, resulting in lower housing costs over time.
Building Under a Bitcoin Standard
Deflation under a Bitcoin standard would lead to lower construction costs, making it more affordable for individuals to build their own homes. However, specialization and division of labor would still exist in the construction industry. Entrepreneurs could earn interest by investing their time and capital into building houses for rent. The cost of building a house, including materials, labor, and land, would determine the price. Building a house would be suitable for individuals with expertise or those who enjoy the process. Others may choose between buying and renting.
Buying Under a Bitcoin Standard
Under a Bitcoin standard, real estate prices would depend on supply and demand. Factors such as location and scarcity of land would influence prices. While some regulations may still exist, they are unlikely to be as restrictive as they are today. Financialization would be lower, leading to cheaper housing over time due to deflation. When buying a house, the opportunity cost of not being able to rent it out for additional income should be considered.
Renting Under a Bitcoin Standard
The average cost of rent in a given area would be determined by the average disposable income of households in that area. Over time, rental prices would naturally emerge from the market. Rent is a market phenomenon influenced by entrepreneurs willing to invest in house production to earn originary interest. Renting allows individuals to use surplus money for other important purposes, such as financing a business or saving.
Interest Rates Under a Bitcoin Standard
Under a Bitcoin standard, the market interest rate would depend on the supply and demand for capital. Unlike a fiat standard, where interest rates are tied to inflation, the risk-free interest rate under a Bitcoin standard reflects the risk of loss of bitcoin in self-custody. The interest rate on a loan would likely be the deflation rate plus a risk premium to compensate for potential bitcoin losses. This would lead to higher interest rates, reflecting the true market conditions.
Lending Under a Bitcoin Standard
With a finite currency like bitcoin, there is no need to generate additional returns to offset inflation. Bitcoin’s value would be related to economic output, adjusting to productivity gains and losses. The incentive for lending bitcoin would be lower due to the risk of deflation without adequate compensation. As a result, interest rates would likely be higher, and participants would carefully consider lending and borrowing. This shift would lead to a healthier market environment and encourage true innovation.
Bitcoin as Collateral
Under a Bitcoin standard, individuals are not pressured to borrow to keep up with rising prices. However, there are still situations where borrowing would be useful, such as starting a business or buying a house. Bitcoin as
