Bitcoin & Real Estate 102: Is leveraging real estate to buy bitcoin a good idea?

The following is aimed specifically at real estate investors and will show why it would be foolish not to take on reasonable debt to buy bitcoin and why real estate is the perfect collateral for this venture. This article does not intend to explain in detail why one should own bitcoin. Rather, it is assumed that the reader has already come to this conclusion. If not, you can read my article “Is leveraging legacy assets to buy bitcoin a good strategy?”, originally published in Bitcoin Magazine on April 23rd 2022.

The opportunity offered by buying bitcoin with reasonable leverage was laid out by Pierre Rochard in his article “Speculative Attack” (2014):

“On the liability side of the Bitcoiner’s balance sheet there are mortgages, student loans, car loans, credit cards, etc. Everyone admonishes people to not borrow in order to buy bitcoins. The reality is that money is fungible: if you buy bitcoins instead of paying down your mortgage’s principal, you are a leveraged bitcoin investor. Almost everyone is a leveraged bitcoin investor, because it makes economic sense (within reason). The cost of borrowing (annualised interest rates ranging from 0% to 25%) is lower than the expected return of owning bitcoins.

How leveraged someone’s balance sheet is depends on the ratio between assets and liabilities. The appeal of leveraging up increases if people believe that fiat-denominated liabilities are going to decrease in real terms, i.e. if they expect inflation to be greater than the interest rate they pay. At that point it becomes a no-brainer to borrow the weak local currency using whatever collateral a bank will accept, invest in a strong foreign currency, and pay back the loan later with realised gains. In this process, banks create more weak currency, amplifying the problem.” (Speculative Attack by Pierre Rochard, July 4, 2014)

We all know the phrase: “past performance is not an indication of future performance”. We hear it when bank advisors want to insulate themselves from being held responsible for the poor performance of a recommended investment opportunity. While I believe Bitcoin’s past performance is an indication of its future performance, I would like to point out that what I have written here is not investment advice. You should come to your own conclusion. Plus, what I am describing here is not for someone who is not willing to understand bitcoin.

Nothing good comes easy. Bitcoin is much more than a new type of money, it is a new monetary system, open and permissionless. Different from what we know, which makes it complicated at first sight. Bitcoin can be confusing. However, the sooner someone adopts bitcoin, the more likely someone will become part of this new monetary system and benefit from it, as the new system based on bitcoin will eventually replace large parts of the existing system. I will show why real estate owners are primed to accumulate bitcoin using real estate as collateral.

Debt denominated in fiat, i.e. state-issued currencies, that you take on today will lose value in the future while the price of bitcoin rises. Fiat currencies are being printed at the push of a button at zero cost and the supply will continue to increase, while bitcoin’s supply is fixed at 21 million. As per history all fiats eventually go to zero. (@bava23). Bitcoin was engineered to increase in value forever.

Real estate is the perfect collateral for taking on debt to buy bitcoin since it is an income-generating asset (rental income). Therefore, you never have to sell your bitcoins to pay off debts, instead you can use the rental income.

I will show how effective this strategy is using the example of a property owned by a medium-sized real estate development company (Company A):

Since bitcoin is very volatile, you must be careful. Price declines of 40–70% occur regularly in bitcoin. Don’t make yourself vulnerable to price fluctuations. You must deal with volatility, so keep the loan-to-value (LTV) low. I suggest a loan-to-value ratio of 10–25%. In addition, a loan should only be taken out if bitcoin experiences a significant drop in price, as the risk of a further drop in bitcoin’s price is significantly reduced. A loan should have a minimum term of at least five years, ideally 10 or 15 as bitcoin bear markets can historically last up to three years. You should keep the bitcoin for at least as long, ideally forever. I suggest fixing the interest rate for as long as possible. This strategy applies to both individuals and companies owning real estate.

Example

Company A builds and owns a 68-unit apartment building. The property brings in annual rental income of $750,000. A bank in Germany will generally value the property based on 15–20 times the annual rental income multiplier, i.e., $11,250,000–15,000,000. Typically, the construction of such a property was financed by a bank. Upon completion and full occupancy of the property, Company A could apply for an additional $2,000,000 loan with a 10-year term and 5% interest, i.e., $100,000, with the property as collateral from the bank that financed the construction of the property.

The loan would be approximately 13.3–17.7% of the value of the collateral. Company A will use the rental income from the property to service the annual interest charge.

This leaves more than enough rental income to service existing obligations, including the interest charge on the initial construction loan and the provision for any costs that may arise, without creating unnecessary additional risks.

Rental income ($750,000) minus 5% annual interest charge ($100,000) equals $650,000.

Over the past decade, bitcoin has produced an average annualised return of 230%. Assuming that bitcoin grows at a 60% annual rate-of-return in the future, after 10 years, the bitcoin acquired with the loan will have the following value:

However, this would mean that the value of bitcoin, currently about $24,000, will rise to over $2,600,000 in 10 years. For me as a Bitcoiner, this price is a possibility, especially considering that roughly 10 years ago, the closing price for bitcoin was $13.45 on December 31, 2012. But I don’t think bitcoin will develop as quickly because it’s simply a matter of bigger sums now to see such growth, this would require a large number of nation states and corporations to adopt bitcoin as a reserve currency, which will most likely take more time to play out. We should, therefore, cap the bitcoin price at $1,000,000 by 2030. This assumption is based on a bitcoin price forecast by ARK Invest.

Assuming a bitcoin price of $24,000 from the time this article was written, Company A can buy 83.333 bitcoin with $2,000,000 ($2,000,000 divided by $24,000). Assuming bitcoin grows to a price of $1,000,000 by and after 2030, the bitcoin purchased with the loan will be worth approximately $83,333,333 after 10 years. A multiple of 41.6x.

No one can predict the future, but we can safely assume that the adoption of bitcoin has reached the point of no return. This has been confirmed by the introduction of Bitcoin as legal tender in states such as El Salvador, the inclusion of Bitcoin on the balance sheets of some Nasdaq-listed companies such as Tesla and MicroStrategy, and the recent announcement by Blackrock, the world's largest asset manager, to apply for a Bitcoin ETF.

Bitcoin’s use case as a digital store of value implies that continuous adoption is accompanied by a continuous increase in price, because bitcoin is fixed in supply.

There is simply no better technology than Bitcoin to fulfill the role of a store of value. Just as humanity never returned to horses after the development of cars, we will not stop using Bitcoin and revert to an inferior asset such as the U.S. dollar, gold, U.S. government bonds, or real estate as a store of value.

Conclusion

It can be concluded that Company A, with a relatively low loan-to-value ratio of about 13.3-17.7% and an interest burden that does not carry unnecessary risk, can make an above-average investment by taking on fiat-denominated debt and buying bitcoin. Real estate is an excellent collateral for taking on debt to buy bitcoin, as you can keep the bitcoin you buy and use the rental income to service your interest burden.

s/o to Jason A. Williams, who encouraged me in my thinking with his statements "Vampire attack equity in real estate."

More on Bitcoin & Real Estate

• Bitcoin vs Real Estate: What is the better store of value?
• Bitcoin vs. Real Estate: Which is the more resilient store of value in times of crisis?
• Real estate vs. Bitcoin: Dismantling the cash flow narrative
• The Role of the Monetary Premium in Real Estate
• Why bitcoin is digital real estate
• Why every real estate investor should own bitcoin
• Bitcoin & Real Estate 101: Maintenance reserves
• Why bitcoin is pristine collateral for lending

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