Those who’ve got a soft spot for stores of value like real estate may appreciate the familiar investment appeal of bitcoin.
This article is a follow up to “Bitcoin Is A Better Store Of Value Than Real Estate,” which made the case for bitcoin being the world’s best store of value. Even if real estate investors disagree with the conclusion, it doesn’t have to be binary. There are a number of reasons why they are ideally suited to invest in bitcoin as well, which this short piece will outline.
LOW TIME PREFERENCE
The absolute scarcity and perfectly known deflationary supply schedule of bitcoin means that holders maximize benefits by having a low time preference — that is, they are willing to forgo immediate benefits for the potential of increased returns in the future. The opposite of this is having a high time preference — being focused on immediate well-being or fast returns — often at the expense of the long term (or at least having limited regard for it). Real estate investors generally also have a low time preference: Institutions model 10-year cash flows as a market standard and most mom-and-pop home buyers enter into multi-decade mortgages or at least acknowledge the drawbacks of buying and selling too often (e.g., significant transaction costs). This mindset is well-suited to holding bitcoin, where, historically, returns have been maximized by holding through one or more four-year halving cycles and high time preference, short-term trading is incredibly risky due to bitcoin’s volatility.
Those with significant portions of their wealth in bitcoin have generally done hundreds and often thousands of hours of work on the subject — the rabbit hole is endless. This helps build an unshakeable conviction, one that continues despite being constantly tested by external forces and volatility. Bitcoiners know what they own and are happy for it to be an oversized part of their portfolios (if not the only asset they own!). Successful real estate investors are often very similar in this regard. They know their asset class so well that diversifying into things such as stocks and bonds can often be or feel more risky for them. It can explain a lot of their initial pushback against bitcoin. But those with an open mind, time and energy to do the work will find that the bitcoin rabbit hole is full of things that both attract them to and keep them in real estate. They may also conclude it does a better job at storing value and growing wealth. Similarly, many real estate investors are specialists within their asset class — whether that be an institutional developer of logistics warehouses or mom-and-pop investors who fix and flip single-family homes. They stick to what they know best and it works for them. This is much like, for example, how Bitcoiners have done the work to conclude that trading other “cryptocurrencies” cannot compete with their strategy of simply holding bitcoin for the long term.
PROOF OF WORK
Simply, a proof of work is a piece of data which is difficult to produce but easy for others to verify. Bitcoin uses a proof-of-work system for block generation, where in order for a block to be accepted by network participants, miners must complete a proof of work which covers all of the data in the block. The probability of being the miner to complete this proof of work is extremely low. It is also extremely difficult, with significant time and energy expended in the process. How this time and energy helps provide value to and secure the Bitcoin network has been discussed at length elsewhere. The key takeaway for real estate investors is that there is significant tangible work done in creating bitcoin and securing the network. Real estate investors ascribe value to their asset being tangible, whether that being the ability to see, touch and feel the finished product or selecting a particular investment because of its physical characteristics and quality. Because real estate investors place value on these attributes, they may also be able to see the value in the significant resources and time that go into securing the Bitcoin network via proof of work.
EMOTIONS, CULTURE AND COMMUNITY
Real estate is unquestionably an emotional asset class. Something that currently performs the dual role of an investment and shelter is inevitably going to be. The Australian movie “The Castle” encapsulates this perfectly. With classic lines such as, “It’s not a house, it’s a home … a man’s home is his castle,” the movie shows that, for so many people, real estate is so much more than an investment. Similarly, home ownership has been a cornerstone of “The American Dream” for decades and marketing slogans such as “rent money is dead money” are treated by many as investment gospel.
The culture of home ownership and real estate investing is something most people have fully bought into and hold dear. In many places, it’s not possible to have a dinner party without discussing house prices. People attach large parts of their identity and self-worth to their home (and often how much they paid for it), with some considering it a status symbol or using it as a deliberate display of wealth. Anybody who’s spent time with a Bitcoiner will attest that, once they start talking about the subject, it’s almost impossible to get them to stop. Their zealous passion for bitcoin cannot be hidden. In time, bitcoin could become the new default dinner party conversation.
Those brave enough to wade into Bitcoin Twitter will find a close-knit online community that will promote and defend bitcoin intensely. Many Bitcoiners have transformed their lives and fortunes as a result of the low time preference behaviors bitcoin encourages. They are grateful for this, as well as the hope and opportunity that it can provide others once they properly discover it. Real estate professionals will attest that much of what they do is about people, managing emotions and personalities, building networks, leveraging relationships to create opportunities. If they choose to engage, they will find a welcoming community that has grown entirely organically; one in which their people skills from real estate are well placed.
CONVERGENCE AND OPPORTUNITIES
Many adopters of bitcoin will gradually decrease their proportional exposure to other assets over time, either deliberately after concluding there is no alternative or accidentally due to bitcoin’s consistent out-performance. However, that doesn’t mean the decision needs to be binary.
In fact, there are areas of convergence between bitcoin and real estate that present opportunities at both individual and corporate levels.
For the individual real estate owner, bitcoin mining at home is increasingly feasible thanks to both readily accessible information and a range of providers retailing equipment including ASICs (mining hardware) and accessories to reduce noise and heat. Many real estate investors prioritize cash flow and yield; mining bitcoin can provide this.
For corporations such as real estate developers, providing land, building and energy infrastructure solutions to bitcoin miners is an area of increasing opportunity as more capital flows into the space. This may create some interesting opportunities for real estate asset managers to create partnerships or new structures that enable miners to do what they do best: They can source cheap or stranded energy sources and plug-in as many ASICs as possible, while enabling real estate experts to develop and own the underlying real estate and earn a yield on it in perpetuity, possibly in exchange for bitcoin rather than fiat currency, or by adopting a revenue sharing model in the same way retail landlords generate turnover rents.
My previous article argued that bitcoin has the potential to extract significant value from real estate over time. In the process, a sub-sector of real estate could emerge: Bitcoin real estate. This sub-sector could ultimately be not only defensive in nature, in the way that real estate always has been, but benefit by being leveraged to the growth of bitcoin. A potentially significant opportunity exists for early movers to create a new real estate niche.
This is a guest post by James Santi. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.