Boosting Creditworthiness with Bitcoin in a Debt-Heavy 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 began operating a fixed exchange rate system. fiat monetary system With floating exchange rates and no standard currency, the money supply around the world has increased dramatically, and most industries now rely on credit to finance their operations and growth.
With further depreciation expected in the value of paper currencies, due to the need for nation states to produce more currencies. He confronts As borrowing costs rise, the creditworthiness of companies across all sectors becomes increasingly important. This is especially true in the real estate sector, which relies heavily on debt. In this context, Bitcoin can play a crucial role as a deflationary currency, meaning that inflation declines over time, providing an increasingly valuable capital base that can help mitigate the risks associated with fiat currency devaluation and boost the creditworthiness of a real estate company. Below, I will explain why Bitcoin should be incorporated into real estate development financing, and how to incorporate Bitcoin into real estate investing from the start.
Why Bitcoin Should Be Integrated Into Real Estate Development Finance
Real estate has been widely used as a hedge against inflation since the inflationary policies that followed the Nixon shock in 1971, closely tracking the growth of the US M2 money supply.As a result, real estate has gained a significant cash premium, demonstrating a collective confidence in its ability to serve as a reliable store of value, a function traditionally associated with money, which is no longer possible due to decades of monetary inflation that have eroded the purchasing power of paper money. However, with the rise of Bitcoin, a near-perfect digital alternative, there is potential for a shift. This gradual shift could reduce the cash 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 incorporating Bitcoin purchases at the start of a development project by including it in the project financing. This approach protects against the scenario where real estate loses its monetary value to Bitcoin, due to Bitcoin’s superior qualities as a store of value.
Similarly, Bitcoin competes with real estate by acting as a globally accessible and usable digital collateral that is purely secured 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 a real estate financing tool. Guarantees In the traditional banking system.
Therefore, we can assume that the increasing use of Bitcoin as collateral, given its easy accessibility and user-friendly nature for both borrowers and lenders, will negatively impact the use of real estate as such. As more people become aware of the benefits of Bitcoin as collateral, real estate may see a decline in its use for this purpose, while Bitcoin’s importance as a form of collateral grows.
It is therefore important to integrate Bitcoin into real estate development from the outset, to ensure that investors are well positioned to benefit from Bitcoin’s growing role in the financial landscape and its impact on property valuation.
My proposal is to integrate Bitcoin purchases into real estate development financing. Allocating a portion of the loan, say 10%, to Bitcoin purchases enables real estate developers to hedge against the risk that real estate will lose its status as humanity’s primary store of value. This strategy prepares real estate developers for a potential shift 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 may no longer dominate.
Benefits of Integrating Bitcoin into Real Estate Development Finance
By integrating the purchase of Bitcoin into the financing of a real estate development and holding the Bitcoin within the same legal entity that holds the title, developers can capture the cash flow from the real estate into Bitcoin, hedge against monetary inflation, and build resilience and creditworthiness over time. This ensures the continuity of their business operations while benefiting from the benefits of both asset classes: Bitcoin appreciation and real estate cash flow.
Integrating Bitcoin into real estate financing would also help facilitate a smoother and more productive transition to the Bitcoin standard, where the value of real estate is expected to be based on its utility, as people could hypothetically save in Bitcoin rather than having to invest in real estate to protect their purchasing power. Additionally, this approach could help developers gain greater independence from the inflationary fiat currency system, which makes it increasingly difficult to beat inflation and maintain profitability.
Inflation sharply devalues paper currencies and erodes purchasing power. Initially, this scenario benefits the real estate industry as people invest in properties to outpace inflation, thereby increasing their nominal value. Furthermore, inflation reduces the real cost of debt incurred to develop or purchase properties over time, temporarily benefiting property owners. However, in the long run, inflation negatively impacts the real estate industry due to higher construction and maintenance costs, and lower income generated from properties.
This dual effect underscores the need for an alternative strategy, such as integrating Bitcoin into credit products to hedge against the negative consequences of inflation. The ideal scenario for integrating Bitcoin into real estate development would involve a financial service provider providing traditional financing while adding a portion of Bitcoin to the loan. By integrating Bitcoin purchases into lines of credit, companies can not only survive but also thrive in an inflationary environment.
This approach benefits the borrower by providing a hedge against inflation, but it also provides the lender with additional security by including an inflation-proof digital asset, Bitcoin, as collateral.
I will now give an example of such a loan.
Example of a Bitcoin Backed Real Estate Development Loan
Imagine a bank financing a $10 million real estate development project. The bank can extend the loan to $11 million and ask the developer to buy Bitcoin for an additional $1 million, bringing the total loan amount to $11 million (91% for the real estate development and 9% for the Bitcoin purchase). This strategy acts as a hedge against several key risks for the borrower:
- It protects against the erosion of the monetary value traditionally associated with real estate due to the growing importance of Bitcoin, a near-perfect digital store of value.
- It provides protection against the risks of monetary inflation.
- It allows the company to build a new capital base by increasing the value of Bitcoin, which can be used to fund maintenance, further construction, or other development projects.
- By owning Bitcoin, especially in the debt-laden real estate sector, the company’s credit rating improves over time.
- Bitcoin, as a highly scarce and decentralized asset, exists outside of the inflationary fiat currency system, providing stability during times of economic instability. In chaotic conditions, its limited supply and independence from central banks make its value proposition even more pronounced, acting as a hedge against financial collapse and strengthening the market from within.
- It is better for the borrower to hold the Bitcoin for the long term and continuously, even after the loan is repaid. This acts as a hedge against confiscation of the property.
- Repeat the process with a new construction project while lending against your held Bitcoin and possibly earning more Bitcoin by funding a new project, ensuring financial stability and continued growth of your business.
Including the purchase of Bitcoin in the line of credit also carries significant advantages for the lender. If the project fails and the property is subsequently liquidated, the lender, and depending on the agreement, and ideally also the borrower, is left with one asset: Bitcoin.
This principle is not limited to real estate but applies to all industries, so I can imagine 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 increase even in the event of a loan default. Bitcoin protects both lenders and potential borrowers in the event that a borrower fails to repay, provided that the borrower also maintains custody of the Bitcoin.
Not only does including Bitcoin in a loan act as an effective hedge against default, it also offers the advantage of rapid and cost-effective liquidation in the event of default. Bitcoin’s high liquidity makes this process much faster and cheaper than real estate. Once financial institutions realize that they can use Bitcoin in this way, it will undoubtedly become a core component of lending solutions.
Properly managing Bitcoin custody is crucial. Consider multi-signature setups or multi-custody solutions to ensure security and control. For lending purposes, non-custody solutions emerge as a secure way to handle funds. Multi-signature wallets, which require multiple signatures to transfer 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 for all parties involved. It ensures that funds can only be accessed with the consent of a majority of all authorized signers, reducing the risk of loss, theft, misuse, or mismanagement.
conclusion
Including Bitcoin purchases as part of a line of credit generally increases the security of the loan structure, benefiting both borrowers and lenders. Bitcoin can be incorporated relatively easily into the financing structure of real estate development. It offers a compelling narrative that challenges traditional views of real estate but offers an innovative solution to growing concerns about inflation and rising construction and maintenance costs.
The integration of Bitcoin into finance is still in its early stages, and there are no known products specifically designed for real estate development. However, the potential is vast and promising. This type of product is likely to emerge from an innovative company that recognizes the potential of integrating Bitcoin into lending products. Traditional financial institutions are likely to be the last to recognize and exploit this opportunity due to their reliance on established systems and regulatory constraints.
The described dynamics are prevalent in most industries, including real estate, banking and financial services, energy, manufacturing, retail, healthcare, technology, aviation, transportation, food and beverage, and many others. Therefore, the integration of Bitcoin into credit products will be beneficial for most industries, making it possible for Bitcoin to become an integral part of credit markets, especially for insuring loans against default. This could enhance the resilience of market players in the face of increasing economic and geopolitical uncertainty.
By embracing Bitcoin-backed credit products, we can usher in a new era of economic empowerment and stability, potentially leading to greater resilience and productivity in the global economy.
This is a blog post written by our guest Leon Wankum. The opinions expressed here are entirely his own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.