Enhancing creditworthiness in a debt-intensive economy with Bitcoin
Central banks have been operating around the globe since 1971, when US President Richard Nixon declared that the US Dollar would not be convertible to gold at a set rate. fiat-based monetary system With floating exchange rates, there is no standard currency. Money supply in the world has increased rapidly, and now most industries rely heavily on credit to fund their operations and grow.
The devaluation is expected to continue, and nation states will need to create additional currencies to compensate. cope Creditworthiness is increasingly important in light of high borrowing costs. It is especially true in the highly-debt-intensive real estate industry. Bitcoin can be a key player in this scenario as it is a deflationary currency, which means that its inflation rate will decrease over time. This can provide a capital base with an increasing value, helping to mitigate risks of fiat currency decline and enhancing the creditworthiness of a real-estate company. Here I explain the reasons why Bitcoin should be integrated in real estate financing and show how it can work from the beginning.
Bitcoin as a Financing Tool for Real Estate Development
Real estate has been widely used as an inflation hedge since the inflationary policies following the Nixon shock in 1971, closely tracking the growth of the US money supply M2. Real estate, which has traditionally been associated with money as it is a store of value and a way to protect wealth, has benefited from a significant monetary premium. However, this has now become impossible due to the decades-long monetary inflation, which has decimated the purchasing power of fiat currency. There’s a possibility for a paradigm shift with bitcoin as a digital, near-perfect alternative. The gradual shift could reduce the real estate premium, and redirect it to bitcoin. Bitcoin offers an alternative that is easier to access and cheaper to store and maintain.
By incorporating bitcoin into project finance, real estate investors will reap the benefits of the integration of the purchase at the beginning of the development project. The approach protects real estate investors from the possibility that bitcoin will overtake it as a currency due to its superiority in terms of store value.
Similarly, bitcoin competes with real estate by serving as a digitally accessible, globally usable, and pristine collateral for lending. Real estate is popular not just because it can be used as a place to store value, but also for its everyday use. collateral In the traditional banking system.
It is therefore reasonable to assume that the increasing popularity of bitcoin as collateral due to its ease-of-use for both lenders and borrowers will adversely impact real estate’s use in this role. Real estate could be used less for collateral as more people realize bitcoin’s benefits.
Integrating bitcoin from the very beginning is crucial to ensure that real estate investors can capitalize on its growing importance in the world of finance and on real property’s value.
I propose to incorporate the purchase of Bitcoin into financing for real estate developments. By allocating, say, 10% of a mortgage to bitcoin, real estate developers are able to protect themselves against real estate’s loss of its position as the primary value store for humanity. This strategy is designed to prepare real estate investors for a possible shift toward a Bitcoin standard. In this hypothetical world, bitcoin would become the primary unit of currency and value in the entire planet, with real estate losing its dominant position.
Bitcoin in Real Estate Development Financing: Benefits and Uses
Developers can build creditworthiness and resilience over time by integrating the purchase of Bitcoin into the financing for real estate developments and retaining the bitcoin in the legal entity holding the title to the properties. This allows them to capture the premium monetary flow from the real estate market into bitcoin. The business will remain viable, while also leveraging both the real estate cash flow and bitcoin price appreciation.
Incorporating bitcoin into the real estate finance industry can facilitate a smoother, more productive and efficient transition towards a Bitcoin standard. This will allow people to save Bitcoin by default instead of investing in real estate in order to maintain their purchasing power. This can also allow developers to be more independent of the inflationary fiat currency system which makes it harder for them and their clients to stay profitable.
Inflation devalues fiat currency and reduces the purchasing power. This scenario initially benefits the property sector, as investors invest in real estate to beat inflation and increase its nominal value. Over time, inflation reduces the actual cost of loans taken out to build or buy real estate. This is temporary good news for owners. Inflation has a negative impact on the real estate market in the short term due to the rising costs of construction and maintenance and dwindling income from property.
The dual effect of inflation highlights the need for a different strategy. For example, incorporating bitcoins into credit products can help mitigate the effects. A financial service provider could offer traditional real estate financing, but with an additional portion in bitcoin. In an environment of inflation, businesses that incorporate the purchase bitcoins into credit lines can survive and thrive.
The borrower benefits from this approach by hedging against inflation, but the lender also gains additional security because they can include a digital disinflationary asset like bitcoin as collateral.
Here is an example.
Bitcoin as a way to enhance a real estate development loan
Let’s imagine a bank financing a $10 million real estate development project. Banks could increase the amount of the loan by $11,000,000 and ask the developer to buy bitcoin for $1,000,000 more, making the total $11,000,000 (with 91% for real estate and 9% to acquire bitcoin). The borrower can use this strategy to protect themselves from several risks:
- This protects you from the loss of value associated with traditional real estate due to the increasing importance of bitcoins, which are a digital asset that is near perfect.
- This is a good way to protect yourself from the dangers of inflation.
- The increase in the value of Bitcoin allows companies to create a new capital base that can be used for maintenance, construction, or any other type of development project.
- The credit rating for a business improves with time if it owns bitcoins, especially in debt-intensive sectors like real estate.
- As a decentralized and scarce asset, Bitcoin exists independently of the fiat inflationary system. This provides stability in times of economic uncertainty. The limited supply of bitcoin and the independence it has from central banks makes its value more obvious in times of chaos. Bitcoin acts as a hedge to financial collapse, strengthening the market internally.
- Even after repayment, the borrower would like to retain ownership of bitcoins for a long time. The borrower can use this as an insurance policy against confiscation of property.
- To ensure your company’s financial growth and stability, repeat the process by acquiring more bitcoins and lending them against bitcoins you have held.
Lenders can also benefit from including the purchase of Bitcoin in their credit lines. The lender will, as well as, depending on your agreement, possibly also the borrower in the case of the failure and liquidation of the project, have an asset.
The principle can be applied to any industry. Bitcoin could become a part of all credit products to protect against default.
Bitcoin’s purchasing power can continue to grow even if a borrower defaults on a loan. If a lender or borrower fails to pay, Bitcoin protects them and possibly the borrower in case the borrower does not repay.
Bitcoins can be included in loans to provide a hedge against non-payment. They also offer the convenience of quick, cost-effective and rapid liquidation. Bitcoin’s liquidity is a major advantage in this regard, as it reduces costs and speeds up the process. When financial institutions realize that bitcoin can be used in this way, it is certain to become an important component of lending solutions.
Managing bitcoins properly is essential. To ensure security, consider multisignature or multi-custodial setups. In the lending industry, non-custodial solution are gaining popularity as an alternative to custodial handling. Multisignature wallets that require more than one signer to send funds offer an advantage to both the lender and borrower by sharing custody. The collaborative nature of this approach increases security and trust by providing oversight and control for all involved parties. The majority must agree to access funds, which reduces risk from loss, theft or misuse.
You can also read our conclusion.
The inclusion of Bitcoin as part of the credit line increases security, which is beneficial to both lenders and borrowers. Bitcoin is easily integrated into real estate financing. This narrative challenges conventional views of real estate and offers an alternative solution for rising inflation rates and costs.
It is only in the early stages of integration that bitcoin has been integrated into real estate financing. No products have yet to be developed specifically for this purpose. The possibilities for real estate development are enormous and exciting. A company innovative enough to recognize the value of bitcoin in lending products will most likely develop this type of product. Due to the reliance of traditional financial institutions on their established systems, and regulated constraints, they are most likely to be amongst those who recognize this opportunity and take advantage.
Most industries are affected by the dynamics described, such as real estate and banking and finance. Other industries include manufacturing, retailing, healthcare, transportation, aerospace, mobile, and food and beverage. In this way, the inclusion of bitcoin in credit products is beneficial for most industries. Bitcoin could become a major part of credit markets to protect against default, and even to provide a means of securing loans. It could help market players to be more resilient in the face rising geopolitical and economic uncertainties.
We can bring about a new age of stability and economic empowerment by embracing credit products backed by bitcoin. This could lead to a greater level of resilience and productivity for the global economy.
The following is a post written by Leon Wankum. Opinions are solely their own, and may not reflect the views of BTC Inc.
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Source: bitcoinmagazine.com
