History of Real Estate as a Store of Value
Over time, real estate has transitioned from being a tangible asset with utility value to serving as the world’s primary asset for storing value. This transition coincides with the “Nixon shock” in 1971, which resulted in decimating people’s purchasing power due to monetary inflation. With central banks adopting fiat-based monetary systems, real estate has become the primary asset for protecting wealth from inflation, storing roughly 67% of global wealth.
bitcoin: A New Store of Value
The introduction of bitcoin in 2009 marked the advent of sound money once again. The finite supply, portability, divisibility, and other properties of bitcoin make it an ideal store of value. Due to these traits, bitcoin is expected to absorb the monetary premium accumulated by real estate over decades of inflation, potentially leading to a collapse in housing values.
Implications on Financial System
The potential shift from real estate to bitcoin as a store of value could fundamentally change the global financial system. Housing, lending, and interest rates would undergo significant transformations, impacting each other and, in turn, changing the overall dynamics of the financial system.
Shift in Utility Value of Housing
Under a bitcoin standard, the factors of supply and demand will determine the utility value of housing. With people saving in bitcoin by default, the financialization of housing may be significantly lower, causing prices to more closely track population changes and land scarcity rather than financial market forces. The cost of building, buying, and renting, under bitcoin, may also vary significantly from the current norms.
Impact on Interest Rates and Lending
Real estate, as a form of collateral in the banking system, may be replaced by bitcoin, given its properties and bear-free nature. With the emergence of bitcoin lending products, the cryptocurrency is likely to replace real estate as one of the elementary assets in the global financial system. This shift can lead to fundamental changes in lending practices, housing costs, and interest rates.
Underlying Factors of Interest Rates
Under a bitcoin standard, the ideal risk-free interest rate would reflect capital supply and demand, adjusted for risk concerning issues like damage or unpaid rent. Unlike the fiat standard, where risk is tied to inflation and a country’s default risk, a bitcoin standard would bring about different considerations, thereby altering the risk-free interest rate component.
### News source: bitcoinmagazine.com