Part 1 : Real Estate and Bitcoin > Inflation
Inflation is quickly becoming a major problem as the cost of living is increasing and the world's governments continue to print money to fund never-ending deficits.
To preserve and grow purchasing power, investors must strategically select assets to protect their economic energy from monetary inflation. Michael Saylor, Chairman of MicroStrategy, estimates monetary inflation is 8%, even though consumer inflation is measured at only 2%.
Consumer Inflation is the cost of a basket of goods and services measured over time. The consumer price index, CPI, measures consumer inflation.
Monetary Inflation can be described as the increase in the money supply of a country. It factors in price changes in both consumer goods/services as well as asset prices when measuring inflation.
Effective Store of Value = Annualized Returns >8%
Declining Purchasing Power = Annualized Returns <8%
The monetary inflation has an 8% hurdle rate that makes most asset classes ineffective as a store of value. Canadians can purchase GIC investments at 5% and safely lose 3% of purchasing power each year. Decreasing purchasing power can be disguised as nominal growth. Real returns can be difficult to see through the inflationary haze.
SP 500 vs. SP500/M3 Money Supply
The SP 500 looks like it has been on an epic bull run but, on a money supply adjusted basis the SP 500 has only been maintaining investors purchasing power rather than increasing it.
The average return of the SP500 is very close to the monetary inflation hurdle which makes it close to a neutral purchasing power position. Many investors want to grow their purchasing power rather than just maintain it and aim to beat the SP500. Real estate and Bitcoin are two asset classes that have outperformed monetary inflation consistently, and can help investors grow purchasing power over time.
Is Real Estate an Effective Store of Value?
Real Estate Investment Trusts REITS have offered a strong performance over the last 20 years beating monetary inflation and delivering 10% average annual returns, offering a balance between risk and reward.
GTA Residential Real Estate
In the Greater Toronto Area, the median price for a detached home has increased from $589,000 in 2014 to $1,258,000 in November 2023, or an average annual growth rate of 11.3%.
Canadian’s use Real Estate as a monetary asset to help them grow their purchasing power and stay ahead of the monetary inflation.
Real Estate has been increasing purchasing power over the long run.
Canadians often leverage real estate as a way to grow their wealth. Canadian Real Estate has enjoyed an epic bull run from 1996 - 2022, and Canadians have come to expect eye-popping returns.
Canada did not experience a significant real estate correction in the 2008 Great Financial Crisis like the United States. Canadian prices are very disconnected from incomes.
Many Canadians focus on maximizing exposure to Real Estate by purchasing excess real estate exposure in order to compound wealth at a faster rate. It is very common to invest in real estate beyond your own personal home through Rental Properties, Airbnb's & Pre-Construction real estate purchases. Real estate builds in 5:1 leverage by default, or even more, if you look at pre-construction real estate deposit structures.
26 Year Bull + 5:1 Leverage + 11% Annualized Returns = Culture of Real Estate Speculation
The 26 year bull market has been riding the long term interest rate cycle down.
There is a possibility that the long term interest rate cycle has changed direction and we may be entering a rising rate environment. Even if the cycle has not changed directions, how much lower can the rates go?
The Canadian real estate market has a high sensitivity to interest rates with prices moving up as
rates drop, and prices falling as rates increase.
Interest rates have a material impact on real estate's ability to be an effective store of value going forward. If interest rates are not as cooperative over the next 10 years as they have
Real Estate Demonetization?
Bitcoin may be demonetizing other asset classes and absorbing their monetary premiums. The concept of demonetization works as investors choose bitcoin as the best vehicle to store their excess economic energy and other asset classes experience less monetary demand.
Gold has underperformed from August 2020 - December 2023 despite high inflation and active global conflicts. Investors choosing Bitcoin as a substitute for Gold may be a factor in gold's underperformance.
#BricksforBits is a phenomenon where investors sell excess real estate exposure to buy Bitcoin, and it is something that I expect has already begun. Demand for real estate may decrease going forward as investors migrate to Bitcoin.
Bitcoin offers Canadians an alternative to real estate that can still beat monetary inflation and increase their purchasing power. A clear example of this is the Canadian Purpose Bitcoin ETF $BTCC launched in 2021, that has already grown to 2.1B AUM as of December 2023.
It is worthy to note that the weakest areas of the current GTA real estate market are in the excess real estate or speculative real estate categories, including condos, rentals, Air-BNB and pre-construction. This suggests that homeowners are keeping their homes, but investors are selling their excess real estate as the interest rates have had an impact.
Is Bitcoin an effective store of value?
Bitcoin is certainly an effective store of value in the countries facing the worst inflation. It recently hit new all time highs in Turkey, Egypt, Nigeria, Argentina, Lebanon and Pakistan. It has also delivered annualized returns of 149% from 2011-2023, far exceeding other asset classes. It only has a short history but it has been an impressive one.
Bitcoin is a global asset and offers a fixed 21 million Bitcoin supply.
8 Billion People / 21,000,0000 BTC
200 Trillion Dollars / 21,000,000 BTC
2.3 Billion Homes / 21,000,000 BTC
59.4 Millionaires / 21,000,000 BTC
330 Million Corporations / 21,000,000 BTC
195 Countries / 21,000,000 BTC
Block Reward + Halving Cycle
Today the block reward is 6.25 Bitcoin/10 minutes. This means miners are generating approximately 900 Bitcoin per day and often will sell this into the market to fund operations. Every fourth year the block reward is cut in half. April 2024 marks the next halving which will reduce the Bitcoin generated per day to 450, and reduce selling pressure in the market. This quadrennial supply shock is one of the critical ways Bitcoin is an effective store of value.
High Correlation to Money Supply
Bitcoin has a very high correlation to the Global M2 money supply. Chart from Global Macro Investor @RaoulGMI
This relationship highlights its effectiveness as a store of value that is able to absorb central bank printer liquidity.
SHARPE Ratio & Risk vs. Return
Despite Bitcoin’s volatility it has offered the best risk adjusted return (Sharpe Ratio) of the last decade and is consistently beating all other asset classes. Bitcoin offers a 60% annualized return over a 69 standard deviation for annualized volatility. “A Different Universe”. - Jurrien Timmer, Director of Global Macro @Fidelity
Bitcoin is an effective store of value based on its 15 years of outperformance, high correlation to M2 money supply, growing hash rate, quadrennial supply shocks and best risk reward in the marketplace over the last decade.
Part 2 : Battle of the Property Rights
Real Estate and Bitcoin have both outperformed monetary inflation over the last 15 years, but which of these asset classes offers investors the strongest property rights and brightest future?
Do you own and control your real estate?
The answer is complex, as real estate is part of a complex system with many participants, counterparties, regulations/restrictions, direct taxation and external forces.
When you buy real estate and put your name on the title you do not purchase absolute control over the real estate but rather a bundle of rights included with fee simple ownership. You may purchase most of the property rights, but some can be assigned to tenants, governments, lenders, or environmental regulators.
Each property will have a unique bundle of rights and is in its own complex system based on the local government’s rules, regulations, taxes, tenants, geography, counterparties and neighbours.
Real Estate Property Rights are subject to multiple counterparties, direct taxes, regulations and external forces that dilute the property rights and can drain economic energy.
Are Real Estate Property Rights Deteriorating?
Governments may choose to change or adjust the complex system at any time by adjusting direct taxation, government spending or regulations. The property rights in real estate are very fluid and constantly changing.
In Ontario, Doug Ford, recently removed the greenbelt environmental restrictions for multiple properties in the Greater Toronto Area dramatically increasing their value.
Shortly thereafter Mr. Ford was accused of cronyism, and an investigation resulted in multiple resignations as well as the properties rejoining the greenbelt and being environmentally restricted again. The value of real estate is subject to the government's current political whim.
New federal taxation rules are targeting Airbnb investors and enforcing municipal short term rental restrictions at tax time. This targeted Airbnb taxation stops landlords from deducting expenses from rental income changing the economic model/complex system Airbnb landlords operate in overnight.
The government is legislating the winners and the losers in the market. This stops property owners from exercising short term pricing power and pushes them into long term tenancies and rent control.
Forcing longer rental terms onto landlords and suppressing rents with very low rent control redistributes the cost of inflation from tenants to landlords and fundamentally impairs the pricing power of real estate. Residential real estate isn’t as hard as it used to be.
Broken Landlord Tenant Board = Broken System
Conflicts between landlords and tenants are high, and cases at the Ontario Landlord Tenant Board are often delayed by 6-12 months. This is a very ineffective system that is not enforcing real estate property rights for landlords or tenants.
Ontario’s Ombudsman says the backlogged Landlord and Tenant Board has been “failing in its role of providing swift justice”, and that delays are hurting tenants and landlords.
If the Landlord and Tenant Board is failing, it is a symptom of property right deterioration. The Government manages the complex real estate system. It operates the housing market game, and through policy, politics or indifference, chooses the winners and losers in the big real estate casino.
“A market where government reaches in to decide who wins or loses is nothing more than crony capitalism” – The Price of Tomorrow by Jeff Booth
Rent Control destroys real estate pricing power
Ontario’s rent control program is a great example of the changing complex system. We can measure real estate pricing power by comparing the Ontario Rent Control, CPI, and the Median Rental Price Growth
CPI is usually a lot lower than Market Rent Growth
Rent Control used to be set at CPI but has been suppressed below CPI since 2020.
Landlord Pricing Power can be calculated by comparing rent control to market rents over five year periods.
Do you own your Bitcoin?
If you buy Bitcoin and hold it in self-custody your property rights are registered on the public blockchain and secured to a Bitcoin private key. The blockchain functions like a land registry and identifies who owns each parcel in the Bitcoin universe.
There are 21 million Bitcoins and each Bitcoin can be subdivided into 100 million small pieces called satoshis. This creates a digital map with 100M x 21M little parcels of digital real estate plots that can be assigned to a key. The owner of the private key controls the Bitcoin linked to that key.
Private key control cannot be diluted or suppressed and is absolute.
Like Real Estate, Bitcoin also operates as a complex system, a digital network with four groups of participants Nodes, Miners, Developers and the Community.
These participants must follow the Bitcoin’s core protocol rules:
Protocol Rules
Block Reward + Halving Cycle
Fixed Hard Cap Supply
Block Time + Difficulty Adjustment
Proof of Work
The Nodes, Miners, Developers and Community all have economic incentives to work together to protect and grow the Bitcoin the Network and enforce the bitcoin protocol.
The key difference between the complex real estate system and the complex Bitcoin system is that the real estate system is designed to slowly drain out economic energy from the asset whereas the Bitcoin system is designed to protect and grow the economic energy inside the asset.
The property rights of the private key cannot be legislated away, restricted or suppressed. The property rights are absolute to the key and property rights / protocol rules are equally enforced among all Bitcoin. If you do not have the private key there is no third party or Court you can appeal to. The property rights are permanently linked to the key.
The saying “Not Your Keys Not Your Coins” can be inverted to
Bitcoin Key = Bitcoin Property Rights
The property rights in bitcoin are simple and absolute.
The nodes and miners enforce them. The participants in the Bitcoin ecosystem are incentivized to protect the network and protect keyholder’s economic energy.
Bitcoin Nodes (Decentralized Communication): Backbone of the decentralized network containing the Blockchain Data. Validates transactions/blocks and enforces the consensus rules of the protocol. The nodes also relay information communicating new blocks/transactions to maintain network synchronization.
Bitcoin Miners (Security): Turn energy into computation power to safeguard the network. Solve mathematical problems in order to win the block reward and the suggest the next block of transactions.
Are Bitcoin Property Rights Deteriorating? The other participants in the Bitcoin complex system are incentivized to defend and support the Bitcoin network and the property rights of private keys. This is the fundamental difference between the complex real estate system and the concept Bitcoin system. In the Bitcoin system all participants are aligned with the protocol rules and property rights of the network.
The participants may not always agree, and the network is constantly upgrading. The core of Bitcoin remains the same but the changes can have a large impact.
Proposed changes to Bitcoin are made through the Bitcoin Improvement Proposal (BIP) Process.
The BIP Process enables the community to self-manage improvements. The Nodes can then choose if they want to support/adopt the proposal.
Bitstamp Learn
Conclusion : Bitcoin Property Rights > Real Estate Property Rights
Real Estate has weak property rights in a complex system, subject to frequent change. The Real Estate asset class bucket leaks economic value through direct taxation, restrictions, rent control and currency.
Real estate’s effectiveness as a store of value is subject to external forces over internal fundamentals. Currency and interest rates may have a large impact on real estate’s future real returns. The Real Estate market is subject to cronyism with frequent intervention and regulation by the politicians of the hour. The Landlord Tenant Board is ineffective at enforcing property rights. The risk is high in the complex real estate system.
Bitcoin has high quality and absolute property rights. It is experiencing very high utility growth demonstrated by the ever growing hash rate. The Bitcoin bucket does not leak economic value, maintaining a fixed satoshi balance and fixed ownership percentage of the Bitcoin network that only the keyholder controls.
Despite the high volatility in price, the Bitcoin Network is actually much safer than the real estate complex system from a property rights perspective. All Bitcoin Sats and Bitcoin network participants have universal and equal property rights, and are not subject to politicians or cronyism.
The absolute control of these property rights is simple and assigned only to the keyholder. These property rights are enforced 24/7 by the Nodes and the Miners. The complex Bitcoin system is a lower risk as the Bitcoin counterparties are working together to enforce the protocol and grow the network.
Choose the economic energy storage bucket that doesn’t leak.
Taylor