As Bitcoin prices continue to rise at a rapid pace, the underpinnings of the Blockchain currency are now falling under ever greater scrutiny. Like most Blockchain currencies, Bitcoin has inherent economic advantages over fiat currencies because of the technology behind it. Below we discuss these advantages and Bitcoin's natural evolution into real estate assets.
Real Estate: the ultimate Blockchain currency
Throughout recorded history, land, houses and buildings have been held as stores of value. In fact, most western banking institutions derive most of their revenue (and perceived value) from issuing debt – often in the form of mortgages secured against real estate.
Real estate also normally appreciates with rising global demographics and demand inflation – as we can see in the world's economic centres, from London to New York, Toronto to Hong Kong. Property prices are significantly increasing in these centres with more and more people purchasing properties to both protect and increase their wealth.
Unlike gold, property has a far greater common utilitarian use as a form of stored value – everybody needs to have somewhere to live. It also has a greater appreciating value. As more gold certificates exist in circulation than the stored gold in vaults to which it makes its claims, gold is a victim of fractional lending, meaning it can depreciate in value.
Fiat Currencies: Commandment vs Covenant
The same is true of traditional or "fiat" currencies. Fiat currencies, which have no intrinsic value other than that attributed to them, are ostensibly under the direct control of governments and of private and central banks.
Because these authorities continually "print" more of denominations of fiat currencies on a monthly and yearly basis by approximately 2.5 percent /yr, these currencies depreciate in value. So as an example, £100,000 is worth approximately £85,000 in relative value after 5 years, or £70,000 after 10 years – just by the mere expansion of the money supply. In and of themselves, fiat currencies are not a good place to store wealth. Like a new car they depreciate significantly as soon as you take possession.
The impact of this 'shrink-flation' is grave. Wages do not keep up with the "printing" of currencies, and employees are being paid effectively less every month under this process. Not only do savings and pensions decrease, but even the contents of a cereal box or tin of coffee can shrink - yet the emptier box or tin costs the same as its fuller equivalent five years ago.
The term "fiat" currency is derived from that Latin meaning: "an order from a supreme authority, e.g., a government commandment". A commandment is a unilateral order from an authority, e.g., The Ten Commandments from Moses. No agreement with the people under its rule is necessary; submission is expected or coerced.
Fiat currencies such as the US Dollar, Pound Sterling, Euro, RMB only have value because the respective governments have ordered it. No other defined assets, such as gold and silver, are redeemable for these paper currencies. Only the power of government commandments and central banks gives fiat currency the illusion of value. The Swiss Franc was the last currency redeemable in gold. Until May, 2000 a Swiss Franc note could be exchanged for gold at any Swissbank.
Bitcoin is a Covenant
Bitcoin, on the other hand, is based on a covenant, an agreement between 'we the people', rather than the command of any one political entity. Bitcoin is based on two unchangeable truths, the amount of Bitcoins is always precisely known and the current and future rate of Bitcoin expansion is a fixed process (only 21 million Bitcoins will ever be 'mined').
These two facts make Bitcoin an attractive currency, immutability of its "physical" amount and its future rate of increase. Knowing that these two facts are impervious to manipulation by governments or central/private banks is driving people to adopt Bitcoins as a currency that offers a better store of value (it is not just 'speculation').
The price increases in Bitcoin are driven by demand for its inherent technical and monetary advantages. This agreement or "covenant" is enforced by Bitcoin's technical characteristics and not by the promises of, or illusion of, value. Bitcoin now offers macro economies and monetary policy makers a real opportunity to restore true value back to currency.
The technical advantages of Bitcoin have enabled it to avoid the tendency of "printing" more of itself as fiat currencies do. However, Bitcoin has not yet replicated the asset-backed nature and value of redeemable currencies – as had been the case with the Swiss Franc when it was redeemable for gold over the counter on demand. This leads to the next natural evolution of Bitcoin: asset-backed Blockchain currencies.
ICO – Initial Coin Offerings
With the technical advent of Initial Coin Offerings, ICOs are now possible in real estate where property assets can be IPLed (Initial Public Listing) on the new breed of Blockchain enabled, Bitcoin-denominated Property Exchanges being announced in London, NYC and Toronto. Using Blockchain currencies these properties can now be divided into infinitesimally smaller units and used as both a better form of storing value and as an alternative form of exchange to fiat currencies. Bitcoin, bound and defined by and to an asset such as property, can soon have the significant advantage over fiat currencies of being a piece of legally owned property with its intrinsic universal value recognised by all and monitored in real time. Unlike gold, which is not easily divisible and cannot be easily carried or transferred (or lived in!), property is fixed in its location and visible to all – a perfect asset for the trusted public asset registries that are the backbone of the Bitcoin/Blockchain monetary system in the rising new 'Asset Economy'.
Although it is still evolving, we need to better understand and trust this new 'Asset Economy'. Specifically designed to counter the challenges, inconsistencies and sometimes dishonesty of traditional fiat currencies, it could enable a more stable economic world where we receive greater and undiminished 'value' for our labour, products and services than our current fiat currencies can deliver.