why Bitcoin Crossing $1 Million dollars is very bad news for ‘Real Estate’
Bitcoin has been the best-performing large asset over the last 10–15 years and shows no signs of slowing down with Bitcoin ETFs finally being approved by the SEC which allows every American investor to invest without jumping a lot of hoops.
Should this trend continue it's not hard to imagine Bitcoin crossing $500k and eventually the hallowed $1 Million.
If and when Bitcoin does cross $1 Million, it will truly be a watershed movement for Bitcoin, the crazy internet money which was mocked by pretty much everyone and declared dead by 400 times by major media outlets would have had its revenge, At $1 million the market-cap of Bitcoin would be $20 trillion or so, that would be larger any another tradable asset except for US treasury market which is the largest financial instrument in the world. Post this event, investors of all sizes (mom-and-pop to soverign wealth funds) will be forced to take notice of the same, and every fund manager will be asked why they are not investing in Bitcoin.
Fund managers the world over would be forced to reckon their failings, Now tracking back a little Ever wonder why fund managers across the world have missed this incredible opportunity especially when Bitcoin has beaten every other investment over a 5 to 10-year duration, why are the masters of Investing so blind to this emerging asset?
The answer is intriguing, like everyone else fund managers respond to incentives — risks and rewards.
Even though every fund manager claims to have your best interest at heart what they really care about is the ‘fees they earn from you and do it sustainably year over year. So unless there is clear approval from an authority like the SEC, fund managers cannot earn fees from you which simply means they will not invest or recommend an asset even if the said asset happens to offer the world’s best risk-adjusted rewards. Not to mention investing in Bitcoin is dull and boring (operations-wise) there’s nothing to do once you are invested except to hold it as long as possible as it's considered a store-of-value type investment, what this means most fund managers cannot create an illusion that they know more than you when it comes to Bitcoin investing, this is another subtle reason why they have avoided Bitcoin up until now.
However should Bitcoin cross $1 million, the tide will finally turn towards Bitcoin with wealthy investors across the world taking notice of it by themselves. This has far-reaching consequences for global financial markets especially ‘Real estate’ as Real estate is one of the most levered up asset in history. No other asset has as much leverage being offered by banks to invest in like Real estate, especially residential real estate.
What does the leverage actually mean?
You see when you go to a bank to ask for a mortgage they usually ask for a deposit of say 10 or 20%, so in order to buy a house worth say $400,000 you will need to come up with at least $40,000 along with some good credit history and a job, etc.
when you buy the house with $40k and the rest as debt from the bank, you are taking on what is called ‘leveraged trade’, when the value of the house goes up from $400k to say $500k you make a profit of $100k but you only invested $40k, so your net returns would be $100k /40k which is almost 250% however as real estate isn't volatile like the stock market, these returns happen over 5–10 years ( usually ), so overall its not that bad. However remember when prices go down, it becomes bad very quickly, if the house price goes down to say $300k, you lose $100k on this investment which means your entire initial investment of $40k would be gone and you will owe the bank $60k ( $40k — $100k loss ), so if this were to happen i.e your house price crashing, banks usually request you pay additional capital and in cases where you are unable to make additional payment they will sell off the house on the open market and try to recover the losses.
The prevailing interest rates also play a huge role in the mortgage market, when the rates go up, your monthly mortgage goes up and if you are unable to pay it in full for a few months, banks usually recover their loan by selling off your homes ( even if the value of the house isn't underwater or negative equity).
Now here’s the scary part
if and when Bitcoin crosses 1 million dollars a coin, it will force the entire investing world to take notice of Bitcoin and even learn about it, should this happen, investors and fund managers who often invest in treasury bonds or bank deposits would be tempted to shift some amount to Bitcoin, if this happened, banks and by extension federal reserve would be forced to raise rates to attract investors back, here's where it gets interesting.
If the Fed keeps raising rates to attract investors back from Bitcoin, it will make mortgage market volatile as more and more people will end up defaulting on their mortgages which will push house prices down which will result in many mortgages going underwater (or negative equity
) , which will force banks to foreclose on them and sell them at a loss which would trigger a chain reaction and become a 2008 type mortgage crisis all over again.
The only option the Fed would have at this point is to buy treasury bonds directly by printing new money, this is called ‘Debt monetization’, this is a highly frowned upon practice only to be used in an extreme scenario and only as a temporary measure.
The reason ‘Debt monetization’ is so deadly is because it's a precursor to ‘Hyperinflation’, every currency that suffers from ‘hyperinflation’ starts with ‘Debt monetization’ i.e. the local central bank buying up government-issued debt by printing new money.
Prolonged ‘Debt monetization’ will result in investors losing confidence in the currency and looking for hard assets like Gold or even Bitcoin and this could become a self-reinforcing strategy i.e as more and more investors invest in Bitcoin instead of Bank deposits or Treasuring bonds, interest rates will have to go up further to attract investors but will keep failing as the asset inflation ( in hard assets like Bitcoin) will be much higher than the interest rates paid by the Fed and banks.
This could result in a full-on currency crisis and usually results in the government passing laws and confiscating hard assets like Gold. The crazy part is unlike Gold, Bitcoin is impossibly hard to confiscate if self-custodied properly instead of leaving it on exchanges or ETFs. If you observe Bitcoin blockchain activity you will see the number of addresses holding 1 Bitcoin is going up significantly and they hardly ever move, this is proof that those who invest in Bitcoin are holding for the long term and potentially self-custodying.
why persistent inflation is bad for Real-estate
while inflation does push asset prices and even rentals year on year, there comes a point when tenants start to feel the pinch, tenants will raise their voices on social media, call landlords greedy and demand rent controls, politicians world over generally favor tenants as they form the majority of the voting population. The situation is especially dire in the developed world where the working population spends up to 70% of their paychecks on rent sometimes.
In a hyperinflationary scenario where rents keep going up 20% or more annually, either rent controls will be set or governments engage on mass house-building activity or a combination of both, any of these will suppress the real estate prices compared to true inflation.
That's not all
if and when Bitcoin reaches $1 million a whole generation of workers would have made great returns on Bitcoin instead of holding govt bonds or bank deposits, this could potentially flip the tide on home buying early on in the career like it did for previous generations, this has an interesting effect, the longer these folks hold on to Bitcoin instead of investing in a home, the easier it will be for them to afford a home as Bitcoin typically gives far better returns compared to investing in ‘Real estate’ and this could become a self-reinforcing behavior where people simply hold on to Bitcoin for longer and longer find house prices falling compared to the returns on their Bitcoin.
There are many more self-reinforcing behaviours that effect Bitcoin’s ascend into the portfolio of every investor in the world, ranging from Bitcoin-backed loans, Bitcoin options, Bitcoin being used in international trade and so on.
Conclusion
If you have come this far, it's probably not a bad idea to learn more about Bitcoin and potentially start exploring it as an investment option before it's too late.
