The Future of Real Estate under a Bitcoin Standard

This article was originally published on Mimesis Capital's Medium account on January 22nd, 2021.

We are in the early stages of a transition between two monetary systems, InFi and DeFi. No, I’m not talking about DeFi as in “Decentralized Finance.” I’m talking about InFi (Inflationary Finance) and DeFi (Deflationary Finance).

As we begin moving away from man-made InFi and towards the inevitable game theoretic convergence on DeFi, we can begin to visualize the new financial system that will likely leave the heads of many 20th century Wall Street experts spinning.

To be clear, DeFi is when the world is entirely under a Bitcoin standard. This is a direct result of Bitcoin’s unique monetary properties that heavily incentivize all individuals to save bitcoin due to natural free market forces. This new system of DeFi will change the way we invest and consume forever.

InFi Vs. DeFi Real Estate

In the InFi world, the price of real estate trends upwards. This is due to real estate having a significantly higher stock-to-flow ratio (scarcity) than the InFi currency (USD), the ability to purchase real estate with cheap credit (mortgage debt), and endlessly rising future cash flows (rent).

In the DeFi world, this likely won’t be the case in the long run. Unlike Bitcoin, real estate has serious carrying costs, including property taxes, management costs, and maintenance costs. In addition, Bitcoin will eventually have a stock-to-flow ratio that is infinitely higher than real estate, and cheap long-term debt will not be available to purchase real estate.

Taking a look at the St. Louis Fed’s Housing Price Index denominated in Bitcoin, we can see a very clear downward trend. Of course the trend down won’t always be this significant, but there are good reasons to assume the trend will never reverse.

And the linear chart is clearly much worse, as the value of real estate has collapsed against Bitcoin.

Real estate is not as scarce as you may think, especially in comparison to Bitcoin, which is perfectly scarce. While there are 7.8 billion people in the world, there is still plenty of area to develop residential or commercial buildings on undeveloped land. Developers can also always build up. The One World Trade Center is worth $3.9 billion and has 94 floors.

Looking far into the future, new land can be created on artificial islands. Flevopolder, an artificial island in the Netherlands, measures 374.5 square miles, and as technology progresses, it will become easier to inhabit new lands, including a potential Mars colony (@ElonMusk).

In a DeFi world, real estate will lose its “store of value” nature, and its price will be based on its actual utility. Since its price will be denominated in Bitcoin, its carrying costs, low stock-to-flow (scarcity) ratio compared to Bitcoin, and its relatively constant utility will generally result in a downward trend of its price over time.

DeFi Home Lending Process

Bitcoin will change the nature of real estate forever. Instead of borrowing “money” to purchase a house, individuals will borrow houses by posting bitcoin as collateral.

Below is how this may work.

House lenders have inventory. Bitcoin holders need a place to live, but don’t want to give up their valuable bitcoin.
The bitcoin holder borrows a house by posting bitcoin as collateral.
The bitcoin holder pays monthly interest payments to the house lender using Lightning.
If the house lender calls the house and the bitcoin holder doesn’t give it back, they keep the bitcoin collateral.

Why Do This?

Pros for property owners:

In case of default, you get paid in the world’s best monetary asset, Bitcoin. The Bitcoin you receive will be worth more than the value of the house over time.
You earn monthly interest payments in BTC on your property.

Pros for property borrowers:

Retain ownership of your Bitcoin, since it will retain its value better than the house itself.
You are “renting” with the option to buy.
Can’t get forced out of your home by a landlord.

The Future of Real Estate

Global Bitcoin adoption will flip the entire financial system upside down. Transitioning from a debt-based monetary system to an equity-based system where Bitcoin is the world’s best collateral will bring massive opportunities to those able to recognize this first.

Thank you to Pierre Rochard for the idea, inspiration, and feedback on this piece.