Real estate, the traditional store of value in modern times, has many attributes that make it an inferior choice to bitcoin for a store of value.
This is not an introductory article explaining what bitcoin is and why other so-called “cryptocurrencies” cannot compete with its properties and network effects. There has been enough written about this already and bitcoin is the victor. What I will contend is that bitcoin can be considered the world’s best store of value by having superior characteristics to real estate — the largest store of value presently. I will look at this briefly through each important characteristic that contributes to an asset retaining its value over time.
“I think the epiphany comes when you realize that bitcoin is the dominant digital property network, and digital property is better than physical property in every way conceivable. If I theoretically designed digital property to store a billion dollars, I would want to hold it in the palm of my hand, move it at the speed of light, vibrate it one thousand times per second. I want it to last forever. I want immortal, indestructible, infinite, all powerful, programmable energy.” — Michael Saylor, founder and CEO of MicroStrategy
Scarcity is almost certainly the most important feature of a good store of value. Some real estate is scarce, a Sydney Harbour, waterfront mansion for example. But most real estate is not. Cities can expand upward through increased density or outward by extending their boundaries. Vacant or underutilized land can be rezoned or redeveloped. Land can be reclaimed from the ocean. Much of the scarcity associated with real estate is driven by government policy rather than true scarcity. Bitcoin is the scarcest asset ever known, because by design, there will only ever be 21 million bitcoin.
Even assuming there is no “lost” bitcoin (where people have lost or died with their private keys), which we know is not the case, a maximum of 0.26% of the world’s 8 billion people will be able to own a whole bitcoin. For context, there are over 56 million U.S. dollar millionaires globally; the majority of them will never be able to own a whole bitcoin despite most owning substantial amounts of real estate. Finally, bitcoin’s future supply schedule is perfectly known. Just over 90% of all bitcoin that will ever exist has already been mined (created) and 99% will be mined by 2035. An asset with a perfectly scarce supply schedule has never existed before.
Ideally, a store of value should be easy to divide into smaller parts to maximize its transactional potential. Physical real estate has obvious divisibility constraints. This has improved over time with the advent of real estate investment trusts (REITs), funds and other fractional ownership models. These allow you to own a security, which gives you a share of the property with certain legal rights attached but rarely any control. It often comes with significant compromises such as constraints on liquidity or fees that drag on returns. With bitcoin, you almost always buy the actual asset itself (unless buying a futures contract, or leaving coins on an exchange — the equivalent of an IOU for bitcoin — approaches I would not recommend). A bitcoin can be divided into 100,000,000 units called satoshis. Today, a single satoshi costs approximately $0.0005. In other words, $1 buys approximately 2,000 satoshis. Even setting aside the inferior legal structure of real estate’s divisibility, it is still impossible to buy $0.0005 worth of real estate.
To be a good store of value, it must be simple to verify authenticity, providing confidence to all parties in a transaction. Physical real estate generally performs very well on this measure — you can see, touch and feel it. However, verifying ownership is less perfect, varies substantially globally and is not always possible without a professional expert’s assistance. Generally, centralized registers or title systems record ownership, but these can still be subject to rare cases of fraud or human error. Bitcoin’s public blockchain is able to be verified by anybody, anywhere, instantly, with no reliance on third parties and with mathematical certainty.
When two or more things are interchangeable and can be substituted for one another, they can be described as fungible. Fungibility solves the problems that arise in a bartering economy where people trade without a monetary medium. Real estate is not fungible: An acre of beachfront land in the Hamptons cannot be substituted for an acre of frozen land in Siberia. Bitcoin’s fungibility is superior. Every bitcoin or satoshi can be treated the same. Its fungibility is not perfect though, as the blockchain is public and traceable, so particular satoshis could be marked by regulators as being contaminated or unacceptable, in the very rare event they were used for illegal activities for example. Network development continues to improve the privacy of users and reduce this problem over time, but more work needs to be done. Nevertheless, bitcoin still triumphs over real estate on this measure.
The ability to be transported and stored easily facilitates global trade and protects against theft or loss. Real estate fails miserably on this measure: Clearly an office building in Manhattan cannot be transported to central Tokyo. Bitcoin is the obvious winner here, being the most portable store of value humans have discovered. It can literally be stored in your head by memorizing a 12- or 24-word private key (or “password,” which can also be kept safe on the equivalent of a small flash drive and transported in your pocket). A bitcoin transaction enables billions of dollars of value to be sent globally, instantly and at an extremely low cost.
To be a good store of value, an asset must not degrade or be easily destroyed. Vacant land can meet this criteria, however, developed property falls short as its materials cannot last forever and in rare circumstances can be destroyed substantially or entirely by natural disasters or war. Bitcoin is a decentralized digital record with no issuing authority or controlling individual. Ultimately, it may be considered durable provided the network that secures it survives. It is still early, however, the signs of bitcoin’s durability grow consistently — whether it be attacks by hackers in its infancy that are now a thing of the past or countries unsuccessfully attempting to regulate or ban it. However, neither real estate or bitcoin can conclusively claim victory on this measure, yet.
Permissionless (Censorship Resistant)
The ability of a good to withstand a government or corporation’s control, confiscation or censorship is an increasingly important factor in qualifying as a reliable store of value. Real estate is not immune from confiscation, whether that be through compulsory acquisition or eminent domain laws or communist regimes seizing private property. It is also controlled through planning and zoning regulations and can be impaired by political decisions such as the moratoriums on rental evictions that happened in many countries globally during the COVID-19 pandemic. Additionally, not all real estate tenure is created equal; freehold is the most desirable but still subject to the aforementioned risks. Also, in many jurisdictions, you cannot actually own real estate in perpetuity. Rather, you acquire a long-term leasehold or in some cases, such as in China, “land use rights.” Bitcoin excels in its censorship resistance. It is “permission-less” in that no external intervention can prevent a transaction being allowed by the distributed peer-to-peer network. Confiscating a 12- or 24-word private key which could be kept in somebody’s head is also very difficult and inefficient at scale.
An ideal store of value should not need to be professionally managed by expert individuals or corporations and be accessible to everybody. Whether it be a single family home or a 1 million square foot office building, almost all forms of real estate require ongoing intervention to ensure operations are maximized and value preserved. Bitcoin does not demand this from its users. Once acquired and properly secured, the owner has absolutely nothing to do until they spend, sell or pass it to their descendants. Bitcoin isn’t burdened by recalcitrant tenants or blocked toilets. It is not management intensive and is an open monetary network that anybody with an internet connection or phone can access. Its U.S. dollar price currently means the barrier to entry is extremely low, with $1 buying approximately 2,000 satoshis (there are 100,000,000 satoshis in a single bitcoin). In contrast, as the majority of first home buyers around the world will attest, real estate is increasingly inaccessible. The 15 most expensive cities in America have a home price-to-income ratio in the 7–14 times range and affordability is decreasing over time. Data shows that, while median household income has grown from $63,292 to $67,521 over the past 20 years, median house prices have grown from $227,600 to $403,900.
Low ownership cost
A good store of value should not be costly to hold. Real estate is burdened by maintenance costs and capital expenditure in order to retain its value. Billions of dollars of bitcoin can be stored virtually for free in a fully self-sovereign manner in perpetuity. Different owners will choose to adopt different security models that may involve trusted third parties; this comes with a slightly higher cost and other trade-offs but still costs less than the fees of third-party real estate funds or property managers.
The ability for an asset to be converted into another quickly, without losing any value, is a key attribute of a good store of value. Real estate is widely acknowledged as an illiquid asset, taking weeks, months or years to transact and being exposed to price fluctuations (for many reasons outside of the owners control) during a typical sale process. The depth of the buyer market is also extremely variable based on its lack of fungibility. REITs and some funds partially solve the liquidity trap, but come with their own compromises. Bitcoin does not suffer from these weaknesses, with approximately half a trillion U.S. dollars of value being transacted on the Bitcoin network each quarter and the ability to liquidate substantial quantities near instantly.
As the world’s largest store of value presently, real estate is famed for its ability to act as collateral and provide owners with the benefits (and risks) of leverage. Arguably global real estate prices have been the biggest beneficiary of a secular, multi-decade downtrend in interest rates, continual expansion of the money supply and more recent unprecedented central bank interventions. Globally, there are various government schemes that provide incentives to borrowers to maximize leverage (such as Australia’s negative gearing rules), supercharging returns over the long term, even though volatility occasionally liquidates weaker borrowers. Despite recent murmurs of QE tapering and interest rate rises, many argue that such moves would collapse currencies or bankrupt governments, so leveraged real estate is likely to remain an attractive store of value for some time to come.
Bitcoin flips this model. Its characteristics as a store of value are enhanced when held without leverage. Relatedly, the market for fiat currency loans with bitcoin as collateral is extremely immature, with four main risks. The first is the counterparty risk: Most loans are provided by early stage, VC-backed startups with balance sheets of unknown strength (or individuals in peer-to-peer structures). The second is the cost: Interest rates are high. The third is the security model: It is difficult to reliably hold bitcoin in a way that appropriately allocates risk between lender and borrower. The fourth is bitcoin’s price volatility, causing covenant breaches triggering loss of bitcoin through automatic liquidation (even if it were possible for additional collateral to be posted). For most borrowers, it may be possible to de-risk one or two, but not all four of these areas. Consequently, real estate currently provides superior leverage benefits, particularly on a risk-adjusted basis. This contrast will likely change in line with bitcoin’s maturation. Some macro investors already argue it is the most “pristine” form of collateral possible, but the product ecosystem needs to catch up.
A common critique of bitcoin is that it is too volatile. This might not be surprising given its short history. While volatility remains a factor today, it continues to trend down slightly over the long term as the asset matures. The bitcoin market trades 24/7 and never closes, so the ability to smooth out volatility either artificially through arbitrary quarterly or annual valuation cycles and an appraisal process subject to human frailties and manipulation doesn’t exist like it does in the real estate market. It is difficult to see this dynamic changing much in the short to medium term, but it is reasonable to expect the trend of gradually lower volatility continues in line with bitcoin’s maturity. Individual circumstances such as forecast holding periods and portfolio allocations are also considerations when analyzing bitcoin’s volatility. While 30%-plus drawdowns in short periods of time might never be seen in real estate, bitcoin can also claim that its 200-week moving average price has never fallen — a testament to its consistent growth trajectory over 12 years. Nevertheless, at a headline level, real estate appears to be much less volatile than bitcoin. But it is worth noting the impact of high leverage on short to medium time frames when markets turn, which can cause significant volatility, particularly in more liquid real estate assets such as REITs or those regularly marked to market.
Like gold and silver have done for thousands of years in performing the dual role of monetary asset and commodity, real estate provides its owners with value through utility. It can be lived in or used by owner-occupier businesses for production. Clearly this is not a feature bitcoin offers. However, it can be argued that the utility value of real estate is significantly less than its value as a financial asset. The trend of the utility value of real estate in relation to its value as a financial asset can be observed in its rental yield. It doesn’t take much research to see how consistently rental yields have trended toward zero over a multi-decade horizon, vastly outstripping the growth in household incomes (e.g., it has become much less affordable to own your home) or growth in the income of businesses that occupy it for productive uses. The financialization of an asset whose number one feature is the ability to be occupied has been driven by the secular, multi-decade downtrend in interest rates and expansion of the money supply. If this driver were to change, the premium could dry up or reverse rapidly.
The longer real estate acts as the world’s largest store of value, the harder it will be for something else to replace it. Bitcoin was only conceived in 2008 but has already withstood substantial challenges to provide confidence that it will not go away. In the last two years, we have seen institutional adoption grow (for example, over $80 billion of bitcoin is known to be held in corporate treasuries), market capitalization exceeds $1 trillion in value, and countries are beginning to adopt bitcoin as legal tender and a reserve asset. Bitcoin’s trajectory continues unabated despite its critics, and the longer it not only survives but thrives, the greater the world’s confidence that it will continue to exist long into the future. Nevertheless, real estate obviously remains the leader on this measure.
A common critique from mainstream financial circles is that bitcoin has no intrinsic value because it produces no cash flow. In contrast, real estate produces generally reliable and consistent cash flows that can be forecasted and valued. Importantly, technical and financial innovation in bitcoin moves much faster than in the legacy system and it’s only a matter of time before reliable low-risk yield products hit the market. With investors starved for yield, this could be a further catalyst for rotation from traditional asset classes and real estate into bitcoin. Nevertheless, it has already been contended that bitcoin is more divisible, verifiable, fungible, portable, permissionless, accessible, liquid, has lower ownership costs and, critically, is set to be the scarcest major asset ever to exist in our lifetimes. The users that bitcoin provides value to are not looking for cash flows that can be discounted to a present value, but a better way to preserve their expended energy (savings) in perpetuity, as well as transfer potentially billions of dollars of value instantly across space and time.
The market opportunity for bitcoin is significant. Savills estimated the value of all of the world’s real estate was $327 trillion in 2020, with 79% of this being residential real estate. Real estate stores more value than all global equities and debt securities combined. The value of all gold in the world, which many have already argued will be imminently demonetized by bitcoin, is under $12 trillion. At the time of writing, bitcoin’s market capitalization is less than 10% of gold’s. If gold were to hold its U.S. dollar price, simply “catching up” would value one bitcoin at around $500,000.
Although the market is still developing and bitcoin can never provide physical utility, or for now the long track record of real estate, on every other measure it has the potential to become the world’s most sought-after store of value and in the process extract a significant amount of wealth from the real estate sector.
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