We Study Billionaires - The Investor’s Podcast Network - BTC199: Bitcoin's Collateral in Real Estate w/ Leon Wankum (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. I bring back a really popular guest, Leon Vancom, who's a major investor and developer in the real estate space. Leon has been an instrumental voice in the Bitcoin community because he's one of the few investors that understand the value prop of Bitcoin while also continuing to build and invest in real estate in a responsible way. One of the concerns that Leon brings up during the show is the growing CAP-X that's associated with physical property, why underlying return assumptions were grossly skewed prior to COVID, and what owners in real estate can do

Starting point is 00:00:35 moving forward to potentially protect themselves from very illiquid property markets in the coming decade. This conversation was quite the banger, and if you have friends or family in real estate, Leon gives you plenty to think about moving forward. So without further delay, here's my chat with Leon. Celebrating 10 years, you are listening to Bitcoin Fundamental. by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone, welcome to the show. I'm here with Leon.

Starting point is 00:01:15 Welcome back. It was great seeing you in Riga, and welcome back to the show. Thanks for having me again, Preston. Thank you. Hey, so you crushed it. You went on stage. You're talking about Bitcoin and real estate and how this is an important thing

Starting point is 00:01:29 that anybody in the real estate business needs to be considering for addition to their balance sheet. I'm assuming you got some good feedback after the presentation in Riga, walk us through the experience. Sure, I'd love to. I have to say I've got really positive reviews or feedback after doing the show with you in January. A lot of my friends that are in real estate listen to the episode, and they told me it really helped them to switch or it really helped them to understand

Starting point is 00:01:54 what's happening potentially and how Bitcoin as a superior or near-perfect store value affects the real estate industry that quite frankly has benefited from monetary inflation because people use it to hedge themselves against inflation, but they do understand that the system has reached potentially a tipping point where inflation at this point affects the real estate industry negatively because of the increased capax, the increased construction costs and also the higher interest rates that make it unprofitable in some markets at this point to build real estate.

Starting point is 00:02:28 So when I went onto the stage in Riga, what I wanted to do, I really wanted to show the real estate industry that as a real estate developer, so if you're in the real estate business because you like the building environment, you're an architect, you're a real estate developer, you are a real estate investor with a long-term view. It's not about one asset or the other, but it's about how to integrate Bitcoin into real estate strategies and how to use both assets and proper sequence to create a resilient portfolio and also provide affordable housing to the market. And I hope that I was able to give a good idea of how that can be.

Starting point is 00:03:04 done potentially. We have some of the slides, which we're going to pull up here later in the presentation because they're bangers. But you bring up a what I think is a really, really important point, which is if you expect the CAPEX, the capital expenditures for sustainment of properties, to be dealing basically with inflation and an environment that is priced way differently than where it was, call it four years ago or eight years ago, if you're not aware of what that cost does to the erosion and just your operational expenses, I think that you're in for a very rude awakening in the coming decade, especially if the inflation continues to persist, which I think anybody in Bitcoin is going to see that. But for a person that's not a Bitcoiner, and they're hearing

Starting point is 00:03:49 us say that we expect inflation to be higher for the next 10 years, and they're kind of like, well, how do you know that? Or why are you saying that? How do you respond to that person? To be honest, I think the answer is pretty simple. If you look at it, at the debt, I take the US government as an example, what I heard recently, it might have been you who mentioned that. It's about 78% of the income tax is used by the US government to pay off that debt. So that basically means there's not enough tax available to pay off their debt, but governments need to incur additional debt just to pay back their debt.

Starting point is 00:04:24 So the way that the system is set up, there needs to be another wave of monetary inflation, monetary debasement, meaning there needs to be more currency issued by the government in order to pay the existing debt. So it's really the design of the Fiat system. Yeah, it's just the math. We're talking CAPEX, which is usually the physical replacement. So let's say you have a hot water tank that goes out on a building or you have, I mean, we could go into the long list of all the physical things that encompass the real estate and the replacement cost of all this and how it's going higher. But it's not just the physical CAPEX. It's not just the physical CAPEX. It's also the OPEX of if you're going to go hire a plumber, the cost compared to four years ago

Starting point is 00:05:06 is, what, double? It's not the same. You're not even in the same ballpark. And so even performing the maintenance, the physical labor is going up in a way that if you're building that into an expense structure of a building, this is something that you have to consider. And I say all this because I think if you talk to a typical person off the street and they're looking at commercial real estate in downtown Baltimore or. or San Francisco or any of these cities that the prices are down 80% from where they were marked

Starting point is 00:05:36 four years ago. I think a lot of people would look at the top line and they would say, oh, it's because the people are working from home now and they can't keep the buildings full. The occupancy rates are way lower, which are all true statements. But I think it's only half of the equation. I think people are totally ignoring the expense side of it from the Capx and OPEX side, which I think is equally important, and maybe even more important, once they figure out how to maybe apply more utility to the buildings. I'm curious, do you agree that that's where most of the focus is? And is there other things that we're not thinking about or that you think real estate developers and owners of real estate need to be thinking about?

Starting point is 00:06:19 Yeah. First of all, I agree with you. And then I just shortly lay out how I as a real estate developer who was still active in real estate development, even though my focus at the moment is pretty much on how to integrate Bitcoin into the real estate structure of our business and the financing structure of our portfolio. So I came into the real estate industry actively. So mentally, I'm involved in the real estate industry for almost three decades, but I became active in the real estate world in 2015, 2016. And since then, due to monetary debasement that came as a response to the financial crisis in 08, interest rates were pushed down to, in Sweden and Denmark, they were at 0, minus 0.05% to stimulate the economy. So over that time frame,

Starting point is 00:07:03 basically until interest rates were hiked in late 2021, 2002, the increase in maintenance costs was something that nobody paid attention to because the rise in currency led people to invest in real estate. So the price appreciation of real estate over the past decade, cost real estate investors. I'm talking about myself now, and I'm just making the claim this is true for others as well. We didn't pay attention to the increase in CAPEX because we made so much money by the price appreciation of the asset

Starting point is 00:07:33 that we quite frankly didn't care. And I had a conversation with a business partner that's older than me in this late 50s. And he recently said to me, you know, Leon, I always liked you, but I thought that you are a little bit crazy. But I really understood that what you've been saying for the past five or six years is really true.

Starting point is 00:07:50 and it was the inflation that drove the price for the price appreciation and the rise and nominal value of real estate that made it such an interesting investment. And at this point of time, since interest rates went up and the cost of capital went up, and people don't have the ability to buy as much real estate, prices are going down, we can really feel the increased capax. And I just want to make another example if we talk about construction costs. So there's a project about 300 apartments that we are currently building. we wanted to start building the apartment complex in 2021, but due to some issues, we had to

Starting point is 00:08:26 start a year and a half later. So towards the end of 2022 and 2022 and 23, and that cost us around 30 to 40 percent more. So we had to take on another financing at a higher interest rate to finish the property. We had two options. Option number one, don't finish the property go bust. option number two, take along with higher interest rates and construct a property in hope that in five or ten years time, through either monetary debasement or because we've built a property that is a great product and has demand from the market. Through price appreciation, we will balance out the increased construction cost. But if there would be no price increase in that building, either due to monetary debasement or because we have a product that is better than another product on the market, would basically lose money. Yeah. That's the reality, unfortunately, at this point.

Starting point is 00:09:17 You said something there that reminds me of a chart that you had in Riga when you were given your presentation that I think most people in real estate would cower when they would see this, be like, there's no way that this is real, right? I'm going to pull this up. And for people that are listening to this only in audio format, just real quickly I'm going to describe the chart. Basically, since 1971, Leon has the monetary supply. and has it charted just the currency itself, the expansion of the currency, and it's going

Starting point is 00:09:49 up at about 6.8% annualized. And then he has the average sale price of a house and how much it's expanding, which is 5.7%, basically 100 basis points below the expansion of the money itself. And then he has the commercial real estate price, which is expanding at 4.4% annualized. And Leon, I'm going to throw it over to you to explain what's your key takeaway that you're trying to help people in real estate understand by this chart? Sure. So, first of all, I think the real estate industry is very interesting and I'm going to continue being involved.

Starting point is 00:10:21 So if you're a real estate developer, I'd just like to invite you to maybe open your mind to what I'm going to say now and don't feel personally attacked. Since 1971, when Richard Nixon, the U.S. president, announced that the U.S. would end the convertibility of the dollar at a fixed rate into gold. He ended the quasi-gold standard that wasn't exist since 19. 1944 since the Brentwoods agreement. And what happened then is that as the monetary supply increased, people were forced and people are forced to invest their money in order to protect purchasing power. And real estate has become the number one choice for consumers that is due to its scarcity

Starting point is 00:10:58 that it shares with Bitcoin, but it's also due to favorable financing options because banks like to lend out money for real estate investments because they charge interest on it. And that creates a revenue stream for them and they understand the asset has. has a cash flow that can be used to pay back the debt. So what happened as a consequence is real estate has accrued a substantial monetary premium. What that means is real estate is used as money. It is particularly loose as a store of value, which is a function of money. So there are three main functions of money.

Starting point is 00:11:28 Number one, it needs to be a good medium of exchange. Number two, it needs to be a good store value. And number three, it needs to be a good unit of account. And fiat money is a bad unit of account because it loses value. So if you use it as a unit of account, you actually get poorer over time, sometimes maybe without knowing it, knowingly. And it's a bad store of value due to monetary debasement that has decimated people's purchasing power.

Starting point is 00:11:52 So people use real estate as money. They use it to store value and has become the number one store of value in the world. And its rise in nominal value really or largely reflects the debasement of fiat currency and the trend that you just explained and that I tried to show here is striking me. And when I looked into it, I was actually surprised. I always knew, not always, but since I've got into Bitcoin, I've been aware of the fact that people use real estate to hedge against monetary debasement, but that the trend lines are so similar, I think was actually surprising.

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Starting point is 00:16:15 sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. You know what? What I think doaps a lot of people, Leon. So you look at this and you're seeing this and you're saying, wow, that's like really in your face and it feels like you're not even getting ahead if you were buying real estate. But the fact of the matter is, almost everybody levers up a lot when they buy real estate. And they're able to do this because the value of the real estate protects the loan for the bank. So if the bank has to repossess the physical property, that's pretty much risk-free for them, just as long as the price didn't go down. But for the

Starting point is 00:17:04 person who's buying the property, and let's say they lever 90% of the property's value, and I'll use my own, like, area where I live. Let's say you bought a house for $400,000 here where I live, back in the 2020 time frame. The value of the properties here have doubled since 2020. And I know, I know that know, it's different for each region, but for here, they basically doubled almost. So if a person would have only put 10% down on a $400,000 house, their principal was $40,000. And now that same house four years later is $800,000. And so that $40,000 investment is now appreciated, like their principle that they put down is now $400,000 higher than where they did it if they were able to sell the house on the market today. And so you get this way outsized lever.

Starting point is 00:17:53 to return. And I know this four-year period that I'm talking about is not characteristic of the previous decades at all. But I use it to illustrate how your chart that we're looking at here can confuse a lot of people because they're looking at their unique situation of they're highly levered. The prices have skyrocketed in the last four years. And they're saying, oh, my God, like, I need to buy another house because I've made a lot of money. And so there's this cognitive dissidents that's playing out in a major way with respect to real estate because on one hand, I know that there's people out there that just experienced what I described, maybe not double, but maybe 200,000 or whatever the amount would be. And I think that they're getting set up in a way

Starting point is 00:18:39 where this is only going to start accelerating further. And if they're not thinking it in terms, and you have an amazing chart here that also is showing the other side of this. Hold on. Let me get this up here. So this chart, so walk the listener, the person who can't see what we're looking at, walk the person through this because let's say, I want to make sure I emphasize this in that house example, if the person put 10% down, they made out like a bandit because they were highly levered and assuming they can continue to make the payments and all that kind of stuff. But let's say the person did have the full $400,000 and they could have paid for the house outright, the best play for that person would have been to put the 10% down, buy the house,

Starting point is 00:19:22 take the other 90%, or $360,000, and put it into Bitcoin because when we look at Bitcoin's performance over this period of time, as this chart is showing, they would have had outsized performance. So the mix of these two things is how the person would have been able, if this was like a min-max equation, the min-max would have been optimized by still buying the property, but highly levered in Fiat and then taking the additional funds and plowing them into Bitcoin because of Bitcoin's 50% annualized kegir

Starting point is 00:19:56 or whatever it's been historically. That doesn't mean that's what it'll be in the future. But I'm sorry I'm talking to that. This is a topic I'm very excited and passionate about and I'm stepping all over your toes. I'm going to get out of the way. Here's the chart. I'm sorry to keep talking, Leon.

Starting point is 00:20:08 I'm really sorry. Not at all. I'm very passionate about it as well and I could talk about it all days. So I'm very happy that you enjoy talking about it also. But I quickly also for the listeners, the name of my presentation in Riga was Bitcoin's use as collateral in real estate financing. And the reason for me choosing a topic was that I wanted to show a way for real estate developers to continue the existing business, but also if what we say is true, if Bitcoin as a superior store value to real estate is going to be preferred by the majority of people to store value function of real estate,

Starting point is 00:20:47 become less important. So you need to add Bitcoin into the business to keep being an attractive investment case. Right. So what I'm presenting here is, or what I'm trying to say is that one of the biggest issues of the Fiat system is that people need to invest to outperform inflation. They invest in scarce assets that have a utility value like real estate. And by doing that, they drive up the cost of housing and they drive up the cost of living. And I believe that Bitcoin presents a solution to the housing crisis because it's a superior store of value and the superiority of Bitcoin as a store of value becomes very obvious. When you look at the price or the average price of a home in the US and Bitcoin, so on

Starting point is 00:21:27 2016, we can see that the average price of a home was around 1,000 Bitcoin. Today, it's around 10 Bitcoin, right? So you can really see, even if you buy a house on leverage, you will not outperform Bitcoin. And I quickly out of my head, I hope I'm not going to make any mistake here. recently I published a newsletter on the economics of using leverage, of using real estate as collateral to ensure debt to buy Bitcoin. I compared it with buying real estate on leverage. And I make the following case.

Starting point is 00:21:56 Let's assume that Bitcoin costs $100,000 and you have a million dollars that you took out as a loan and you buy 10 Bitcoin, right? And assuming that Bitcoin grows 40% over the next decade and then 20% 10 years after, in 10 years, it will be worth $29 million to 10 Bitcoin, and in 20 years, 170 something, right? And if you buy real estate on leverage, and if you invest $1 million, of which 20% could represent equity, because usually if you invest in real estate, you need to bring 20% 30% equity, and 80% represent a loan. I quickly get the numbers up here, because I've written them down in an example.

Starting point is 00:22:40 the residential real estate project over a 10-year period would grow from 1 million to 1.7 million and over a 20-year period from 1 million to 3 million. So just compare these numbers, right? Bitcoin outperforms real estate by order of magnitude that is hard to imagine because it is a monetary savings technology that was designed to increase in purchasing power. And because it's absolutely scarce, it outperforms real estate, which is relatively scarce. And since we can assume that people will prefer saving in Bitcoin rather than investing in real estate, we can also assume that the monetary premium that sits in real estate flows into Bitcoin.

Starting point is 00:23:20 And then the question is, what is the consequence for the market, for the individual, and for the real estate developer? So for the market, this is a great development. Why? Because it's going to decrease the cost of housing. This will benefit consumers. This will benefit tenants who have been particularly burdened by rising housing costs. since 1971. But as the speculation that happens with real estate potentially moves over to Bitcoin,

Starting point is 00:23:46 real estate will become a business, right? It's not going to be an asset that is going to increase and price continuously due to monetary debasement. It's going to be a business where you offer a service to the market like housing or you provide retail space, you provide a hotel or whatever and you get paid in return. But in order to stay thriving and to survive the shift onto a Bitcoin standard, a hypothetical reality in which real estate may no longer dominate as a store value, real estate developers have to incorporate Bitcoin strategies in order to hedge against the scenarios, I just explained. And I believe these strategies, these innovative strategies, on one side, there are linked

Starting point is 00:24:24 to the building environment. I think 3D printing isn't extremely interesting, right, if you want to stay competitive and if you want to bring down the cost of production, the cost of construction, in pre-manufactured housing parts, the assembly of pre-manufactured housing parts, the assembly of pre-manufactured housing parts that were 3D printed might also speed up the process, right? So it's important if you build, you want to be finished as soon as possible because usually if you're late, you still have to pay interest on the construction loan. So the longer you take building, the faster, the longer you take, the more expensive it gets. So I believe

Starting point is 00:24:56 these are strategies next to Bitcoin that real estate developers should incorporate. But predominantly, the strategy that real estate developers should use is the addition of Bitcoin and into the existing business structure as a store of value especially. Talk to us a little bit about that. How do they do this in practice? Sure. If you like, there's another slide. I think it's exactly.

Starting point is 00:25:17 It's this slide. I can run through it. I presented this slide initially in Prague at BTC Prague. And then for Riga, I decided to focus on the last point. But I quickly go through the five main strategies and then I'll focus on the last one. So the first thing that real estate developers can do, And then I think that's quite obvious. You can use Bitcoin to build maintenance reserves.

Starting point is 00:25:40 It also maybe answers your question at the beginning how to deal with increased CAPEX. So something you could do, you could use a service like Relay in Europe or Swan in the US or River for monthly or bi-monthly purchases where you'd use 5, 10, maybe 20% of the rental income to stack Bitcoin. And I can see we've started doing that in the depths of the bear market in this bear market. And we used around 5% of the rental income. And just those 5% that we invested in Bitcoin are now 10% of the value of the whole property. Wow. I think that's pretty crazy. And then secondly, obviously you could diversify and hedge.

Starting point is 00:26:21 What do I mean by that? If you sell real estate, you have the option of investing in more real estate projects or diversifying into Bitcoin to create a bit more resilience in your business structure and also participate in the exponential value in. increase of Bitcoin. And then something that real estate developers usually do, once the difference between the debt that they have to pay and the market price or the nominal value increase of the real estate project, once there's a shift and they payback debt, and there's an equity opening that opens up. They usually, or we usually, refinance existing buildings and we take

Starting point is 00:26:58 the additional capital and we buy real estate with it. But I believe, similar, and I mentioned this on our last show, but I mentioned it again because I think it's very important. Similar to what Michael Saylor did with micro strategy, real estate developers can use the assets to incur debt and buy Bitcoin and hold a long term, take the cash, pay back the debt. And then fourth, fourth thing, I think this also really ties into what debify. Leon, the question that I got on that last point was, what amount are you saying? Because some of that's tied to the timetable. If you're going to go ahead and borrow, like how long should real estate developers think through their holding period when they're thinking about Bitcoin?

Starting point is 00:27:36 Oh, that's a good question. That's a very good question, actually, because I'm going to tie it into my personal holding period for real estate, which is 30 years. I always say 20 to 30 years, ideally forever or 100 years. Wow. Okay, that's longer than I was expecting you to say.

Starting point is 00:27:51 Okay. You were saying about DeBify. Go ahead. Yes, no, sure. So I believe that next to being near perfect money, Bitcoin is pristine collateral for lending. And that is especially important in the transition phase onto a Bitcoin standard because as long as Fiat interest rates rise slower than Bitcoin in purchasing power, it makes sense to borrow against your Bitcoin and spend Fiat instead of Bitcoin. By saying this, I do not want to say don't spend your Bitcoin.

Starting point is 00:28:20 I believe Bitcoin is a great medium of exchange. There's no doubt about that. But there is an opportunity cost if you spend your Bitcoin because you give up on the increase in purchasing power, especially. and this early monetization phase. So I think, especially if you run a business, on a personal level, I usually spend Bitcoin if I buy art from Bitcoin artists, or I spend time in Bitcoin's circular economies, or I want to buy goods and services of friends that are Bitcoiners. But as a business, it makes sense to borrow against your Bitcoin because you want to

Starting point is 00:28:51 spend money in the Fiat realm. And spending money in the Fiat realm does not necessitate spending Bitcoin that will increase in purchasing power much faster than interest rates on Fiatrame. had denominated debt. This also brings me to my last point that I want to focus on now. It's including Bitcoin and financing. So what I mean by that is that if you start a new project, you could add Bitcoin into the loan structure. So let's say there's a $10 million investment project, of which $9 million will be allocated towards real estate, residential real estate in this case, and $1 million towards Bitcoin. And I quickly run through the theoretical benefits of

Starting point is 00:29:31 doing that. So first of all, I believe, and this shows how Bitcoin can benefit everybody in the market, it does allow for more stable rent prices and more affordability for consumers in the long run. Why, as a real estate owner at this point of time, the only, not the only, but predominantly, the way that real estate developers deal with increased cap X, increased capital expenditures, increased maintenance, they usually raise rents, right? It's pretty clear. That's how you raise profit market. But by using Bitcoin as a store of value, as a real estate developer, as a landlord, you are not solely dependent on raising rents. And I think that's pretty interesting.

Starting point is 00:30:10 This is an example how Bitcoin can make goods and services, in this case, housing, more affordable over time. Which, and then second. Leon, not to interrupt, but the impact of that is now you're more competitive in the marketplace because you're able to keep your rent at a more competitive rate, as opposed to others that have to raise it because they're dealing with cash. Apex and these other things that the person who's putting Bitcoin under balance sheet. So it makes you more competitive in the marketplace.

Starting point is 00:30:36 Is that the key takeaway with that point? Yes, you're very right. It does make you more competitive. And it also brings some ease of mind because, quite frankly, working in the real estate industry at this point is pretty stressful. I mean, the last year was pretty stressful, I think, for anybody that worked in the real estate industry. And this gives you a competitive edge. And it gives you also peace of mind. And having peace of mind, I think helps to make better decisions as an entrepreneur.

Starting point is 00:31:00 Okay. All right. Keep rolling. Sorry to keep interrupting you here. No, go for it. So yeah, second is you hatched yourself against the erosion of the monetary premium that sits in real estate and might flow into Bitcoin over time. And it also provides an inflation hatch, right? That plays into the first two points that I mentioned by using Bitcoin and by including it in a project from the start as a business, you can protect yourself against the negative consequences of monetary inflation that are inherent into the field system. And it also, it increases your credit worthiness because what happens is the way that Bitcoin

Starting point is 00:31:38 is designed to increase in purchasing power and how it is absolutely scarce and it's disinflationary, meaning there's less supply over time because Bitcoin has excellent monetary properties, it's demand. The demand for Bitcoin rises over time. So by using Bitcoin, you introduce a novel capital base into a company structure that you used to lend against to fund the business, which creates more resilient. If you think about it, Bitcoin is probably the most resilient structure ever to be created by humankind. And what it also does, it protects against property confiscation. And more recently, I've thought about this point a lot,

Starting point is 00:32:13 because as conflicts are increasing in the world, it's important for individuals to be able to secure their wealth. And if you look at real estate, right, at the asset of real estate, as a store of value, It might be within the realm of the fiat system, a functional store value because of the debasement of currency and because of the attractive financing options. But actually, it's not a great store of value. It's illiquid. It's inaccessible for most. It's easy to tax, easy to destroy, and it's immobile, right? So in German and French, in Spanish and Portuguese and in Italian, real estate, translates, in German, it's immobilier.

Starting point is 00:32:52 And that comes from the Latin word immobilis, which means to be. be immobile or stationary. So in a world of increasing conflict, it is not a good idea to save most of your value and asset that can be easily destroyed. And the last point, I think that is very interesting also for the lender is the fact that Bitcoin offers default protection.

Starting point is 00:33:12 So what do I mean by that? If you are a lender and if you lend a business, a regular loan and you include Bitcoin in the loan, you hedge yourself against the business going bust. because if the Bitcoin are properly secured, they will continue to increase in purchasing power, even if the business that you funded goes busts. That is pretty interesting for the lender,

Starting point is 00:33:33 but I think it also offers default protection for the borrower because depending on the model of custody, I think if you borrow from a bank and they give you Bitcoin within a loan, as a borrower, ideally you want to hold the keys. You either want to hold them alone or you want to hold them in a multi-signiture setup where one key is held by the lender, one key is held by the borrower and another one by a custodian, a lawyer, or another third party that can be trusted.

Starting point is 00:33:58 So if the borrower defaults, the lender can access to Bitcoin with the third party, but also if the lender defaults. Because thinking about it, as the risk in the global field system increases, there's also a risk of default within the lender infrastructure. So as a borrower, if you take out the loan, I would suggest to always, this does not just apply to real estate. This actually applies to any type of business, also buy Bitcoin with that loan because it protects you against lender default and it also protects you against the business going bust. In Riga, I gave a personal example from a friend and I want to give it again to a listeners because I think made a very smart move. So at the moment, due to the higher interest rates, there is a crisis in real estate and adjacent businesses like furniture or architecture. And a friend of mine, he acquired a furniture business that was worth around $2,000. billion euros. It went bust and the bank told them, you can buy the business from us. We'll

Starting point is 00:34:55 give you even a loan from it. It's going to cost you 300,000. What he did, he took a $350,000 loan. He bought the business as he was asked for $300,000. And with the additional 50,000 euro, he bought Bitcoin to protect himself against that business going completely bust. Because if interest rates will stay as they are or even go higher, there's a potential for that business to go bust. So he identified here a use case for Bitcoin that kind of blew my mind. And I think he really opened up like a new use case of Bitcoin for me, which is the protection against default in any type of credit product. And we can take any industry in existence, not any but most industries. So real estate, aviation, energy, ship manufacturing, logistics, retail, that are very debt intense.

Starting point is 00:35:45 So any of these industries, which on most industries can benefit from including Bitcoin and credit products. And I quite frankly believe that because of this, Bitcoin will become a part of credit products. And as more banks understand that the risk in the existing system is higher than in Bitcoin, they'll start adding Bitcoin into their products as we go along either directly as Bitcoin the asset or if they're regulated within a US environment or North America and ETF to hedge themselves against further deflation, business is going bust, or a system either collapse or a system

Starting point is 00:36:21 crisis as we saw into 08. And cap rates just trending in a completely different direction than we've seen for 40 years. I think that's the thing that people in real estate have become so accustomed to the cap rates just getting more and more compressed, which means the valuations and the prices just go higher and higher higher. They've got a small taste of this over the last four years where all of a sudden the cap rates aren't getting further compressed and prices are going high, they're going the opposite way. And I think if we have another four years or more of this trend reversal and it moving in the

Starting point is 00:36:54 opposite direction, when you look at something as ill-liquid as real estate and you look at something as liquid as Bitcoin, which I don't think that there's anything on the planet more liquid nowadays, it seems to be almost the perfect thing to pair it with to reduce that risk of the cap rates going the opposite direction now. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together.

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Starting point is 00:40:11 The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's at fundrise.com slash income. This is a paid advertisement. All right, back to the show. You talked a little bit about the borrowing against your Bitcoin there on your second, I'm sorry, on your fourth point. The one thing that I think is lost on people that have never participated in this or don't really understand it is if you're borrowing against your Bitcoin,

Starting point is 00:40:53 the interest rate that you're paying is super high, often double digits. And I just recently recorded a podcast with Max Kai and Pascal, and we were talking about this particular topic. I'm curious to hear your point of view because I think for people that have Bitcoin, they want to be able to borrow against it, but they don't want to be paying these crazy yields of double-digit interest. And so the use case to date has really been more for working capital. So let's say I need access to $100,000. I plan on paying it back in two months or three months. The interest expense for that very short duration really is not that much. And the ease of basically being able to get the loan is for people that have never participated in this. You can go out and you can borrow $100,000

Starting point is 00:41:38 within, I don't know, minutes because it's fully collateralized. It's over collateralized. And it's trading in a 24-7 market. So if the price would come down to the deposit of the collateral, it gets liquidated. And so the person who's basically lending the $100,000 has very, very little risk because they're able to recuperate the amount that they lend out because they're literally looking at this escrow that's over collateralized. So you can go out and get these loans really fast. You don't have to fill out any paperwork. Like in a traditional loan, I've got to go and I've got to say, oh, yeah, I've got to show them all my tax returns. I got to show them all these things in in order to get the loan. This is very different. I don't have to show any of that stuff because it's

Starting point is 00:42:19 over collateralized. But I'm paying a very high interest. And so it turns into this, again, not to say it over and over again, but it turns into this working capital loan type situation is pretty much the only use case. If we start incorporating real estate, that's also basically on deposit as backup collateral, and you mix it with Bitcoin, we should be able to lower these interest payments down to what a standard Fiat legacy finance interest rate would look like. The challenge you get into is how does the lender basically handle the spot market for real estate because it's so insanely illiquid in addition to the Bitcoin that's sitting there? How do you think through this?

Starting point is 00:43:04 Because that really becomes the challenge as to the person who's lending out the Fiat, they're looking at their collateral and they've got this two very different universe kind of setup where Bitcoin's super liquid and you have the real estate, which is as a liquid, illiquid as it gets. and you're trying to make a risk assumption as to the value of that escrow. Yeah. I try to answer that question. I don't have a definite answer yet because I'm figuring out right now and I'm figuring out with also some banks that saw me talking about this and they want to actually put this

Starting point is 00:43:36 into practice. So to answer your first question, I believe the reason for high interest rates at this point of time for a Bitcoin back lending product is simply because there's very little competition and there's a lot of risk involved with it because any regulatory. entity that offers a Bitcoin back product, right, is seen as highly risky. So at the moment, there's a few companies that offer Bitcoin back lending products and interest rates, as you mentioned, are up to 12%, 14%, 8, 9%. So they are higher than Fiat interest rates, but I also want to remind people of one thing. Over the course of the show, I've almost complained about

Starting point is 00:44:15 a higher interest rate environment that makes real estate investment unfeasible. But historically speaking, interest rates are actually not high. They're actually considerably low. It's just that there's so much risk in the system that we continuously need to add liquidity into the system so the system doesn't collapse, that we expect interest rates to be low enough to make any business profitable and to push liquidity into the market. But actually, higher interest rates are a good thing because it creates a different risk management mindset. So what I mean by that is the following. At this point of time, and from 08, until 2021, you could take out a loan for 1 to 2% interest and pretty much invest into any

Starting point is 00:44:57 project that you wanted and you were able to make a return because of the lower interest rate environment. But that has created mispricing of assets and a lot of misallocation of capital. Everywhere, by the way. Everywhere. Everywhere. Yeah. Everywhere. Everywhere. Totally. Yeah. And higher interest rates would create a sensitivity for people to only make investment choices that they deem to be leave to be long-term valuable.

Starting point is 00:45:23 So I think that higher interest rates, generally speaking, are a good thing. At this point of time, interest rates for Bitcoin back products are considerably high, but they'll come down with competition. I've been looking into this for four years already, and I've been trying different companies. And more frequently, I've been taken out some loans against Bitcoin in order to understand how it works, how we can use it for our business, how can use it to have liquidity for my personal life, so I don't have to sell Bitcoin. And interest rates have calmed down.

Starting point is 00:45:49 And to compare using real estate as collateral to Bitcoin, if we as a company want to take out a loan against real estate, it's going to take between three to six months. Why? It's going to take some time to just get a conversation going with the bank. They have appraisers. You know, things might change. Interest rates might change. Maybe an employee in the bank has left a bank that we used to have a good relationship with. So by experience, it can take up to six months. Taken out a loan against my Bitcoin literally took three hours. I mean, the increase in efficiency of this type of capital is just mind-blowing. So I believe that using Bitcoin as collateral will be something that will be more attractive

Starting point is 00:46:28 going forward to more people as more people hold Bitcoin. And as interest rates for Bitcoin-backed loans will come down due to increased competition. And then to answer your last point, in order to help banks feel more comfortable with the volatility, of Bitcoin, I think adding real estate as a less volatile asset can be helpful. Because you ask how to price a loan that includes both real estate and Bitcoin as collateral, I think if you have, let's say, 90% of a loan allocated to real estate and 10% allocated to Bitcoin, the volatility of Bitcoin doesn't really matter. Because in the overall loan structure, to begin with, the volatility doesn't really play in

Starting point is 00:47:10 that much. So I think by adding real estate into this loan structure, an asset that the Treadfire, traditional world understands, we can actually help the speed of including Bitcoin into credit products. I'm going to pull up one last slide here from your presentation in Riga. This was really interesting as well. So explain to the listener, especially if they don't have the video pulled up, what's going on with this chart. Sure. And if I talk fast, just interrupt me with the question.

Starting point is 00:47:38 Okay. So for the listeners and for everybody who's watching, what I did here is I wanted to show how real estate development financing can benefit from Bitcoin. And what I did is I compared a 10 million US residential real estate project with a 10 million investment project, of which 9 million are or where directed towards residential real estate and 1 million towards Bitcoin. And the purpose of doing this is I want to show how adding Bitcoin into credit products, and into loans can help the financial resilience and the credit worthiness of a company. And I quickly want to compare the performance of both projects, and I'll start with the 10 million US residential real estate project. So we backtested this idea from 2024 to 2019.

Starting point is 00:48:27 And in 2019, we start with 10.10 million, right? And we took the U.S. Bureau of Statistics prices for residential real estate, and we added the increase or decrease to the previous year. We can see here in the second year, 2020, the project increases to 10.3 million. And then in 2021, we can see a large increase to 12.9 million. What happened here, that was COVID. We're up to 25% of the US dollar in existence where supplied to the market. And then in the sixth year, 2004, we can see the project is worth 13 million US dollars, right? So the total value increase is 30%. And the year-on-year growth is 5.4%, which is slightly less than the compound annual growth rate since 1971,

Starting point is 00:49:17 which we talked about earlier, which is around 5.7%. And now we compare it with a $10 million investment project, where $9 million are dedicated towards residential real estate and $1 million towards Bitcoin. So in 2019, we start again, $10 million, $9 million in Bitcoin. In the second year in 2020, we can see that adding Bitcoin to this project has already led the project being worth more than in the sixth year of only investing into real estate. While the real estate project grew to $13 million after six years, so in the sixth year, in the second year, a real estate project induced with a million in Bitcoin rose to $13.3 million.

Starting point is 00:49:58 And then we can see it continues to grow exponentially to 7.3 million in 2021. 14 million in 2020. There was the beginning of the bear market. So we see a decrease here. Then in the fifth year, 17.5 million. And in the sixth year, the $10 million investment project, of which $9 million were directed towards residential real estate, and $1 million towards Bitcoin is worth already $20.4 million. And I want to make a point here that we are, right now,

Starting point is 00:50:28 on the second half of 2004 and we took the Bitcoin price on the 1st of July. So if you would take, or if you would wait until the end of the year and we would take the Bitcoin price at the end of the year, the situation would look a bit more favorable towards Bitcoin because we are in the early innings on the bull market, we can expect Bitcoin to be worth a little bit more. So if we compare this now by adding 10% in a project of Bitcoin, the total value increase in six years triples to 105, percent total value increase, which means 15.4% year over year, which is marked up by 54% increase in the purchasing power of Bitcoin and 5.4% of real estate. And which is interesting, in the sixth year, which is the last year we took for this test, the Bitcoin in the investment

Starting point is 00:51:19 entity already make up 43% of the whole investment entity in real estate makes up 57%. And if you would now calculate to maybe five, 10 or 30 years, I would assume that this trend would continue. So let's say in 20 years time, the real estate project might have increased to 15 or 17 million, but Bitcoin will have increased to around 180 million by that point. So real estate at this point really, it doesn't really act as a store value anymore. It just acts as a business. But that's a good thing because I'm going to link it back to what I said earlier. By doing this, by including Bitcoin into real estate.

Starting point is 00:51:57 project financing, real estate development financing, as a real estate developer, you take out the need to consistently increase rents because you can count on Bitcoin increasing in purchasing power and you use the store value function of Bitcoin instead of relying slowly on increasing rents in the real estate project. And I think, again, this shows how Bitcoin benefits both the entrepreneur and the consumer at the same time. You know, your assumptions on growth into call it 10, 20, 30 years from now with Bitcoin, I think is an interesting topic of conversation. Recently, I saw Michael Saylor and Micro Strategy published a GitHub model of what they think the coming decades are going to look like. Have you had a chance to look at this or how are you

Starting point is 00:52:43 thinking about the modeling of this? Because a lot of it, I think you would agree with this, is just where we're at in the adoption curve of what might be the new global settlement layer and that network effect and the returns that you can expect out of so few people being there right now. So how do you think about that return profile, call it 10 years from now, between 10 to 15 years from now, versus how you're seeing that return profile today because there's just not a lot of people there? Yes, good question. So I looked at it and, I mean, well done.

Starting point is 00:53:17 Great model. I am a bit reluctant to give either price predictions for Bitcoin or extrapolate the possible value increase or the increase in purchasing power of Bitcoin because I think it's a little bit unnecessary because once you understand that Fiat is designed to be debased and Bitcoin is designed to be increased in purchasing power. You just understand that Bitcoin is going to increase in purchasing power forever. And potentially in the future there's no point in valuing its worth in Fiat currency because you would rather value it by the products and services.

Starting point is 00:53:47 you can buy with Bitcoin. But I do believe it is helpful to understand the potential of Bitcoin. And what is very clear is it's important to act fast. Why? Because Bitcoin grows in purchasing power exponentially, yes. But as the market cap increase it, it grows less year over year. And there are different models that you can use. I recently saw a model that said from the year 2050 onwards,

Starting point is 00:54:14 Bitcoin will increase by around 10% year over year. then go down to like whatever the productivity increase in the world will be at that point, right? So it is difficult to project the future, but I think these models are helpful to help people understand how greatly they can benefit from Bitcoin because quite frankly, if you think about the situation right now globally with increased inflation, business is tough and living expensive have risen. And if more people can understand, they can utilize Bitcoin as a to store value to counterbalance these negative effects, I think we generally speaking have positive effects within the economy.

Starting point is 00:54:54 What is the number one pushback that you get when you're talking to real estate developers and people that are in this industry and you bring up Bitcoin? What's the one thing that they usually fire back at you? What they usually say is they say two things. And I quickly answer why that is actually a bad argument against Bitcoin. So number one, Bitcoin does not produce cash flow. Number two, Bitcoin does not have an intrinsic value. And I first start with the intrinsic value thesis.

Starting point is 00:55:21 So nothing has an intrinsic value. Value is subjective. And there's a gentleman called Carl Manger, who in 1871 published a book called Principles of Economics. And he's basically the father of the Austrian School of Economics. And somewhat he maybe is also the father, at least mentally, of a fixed money supply in Bitcoin. Potentially he inspired Satushi Nakamoto.

Starting point is 00:55:43 we don't know, but we can assume so, because the cypherpunks, if you read the cypherpun mailing list, they will refer him back to the Austrians a lot. So what Carmengar proved was that the value of any good or service is subjective. There is no inherent value to anything. If you take a Rolex watch, for example, the price of the watch is not predominantly determined by the craftmanship that went into the watch or gold or diamonds that were used to make it, but the watch is worth as much as somebody is willing to. to pay for it, right? And real estate is actually a good example because if you look at real estate,

Starting point is 00:56:18 it has not become so expensive because it's utility increased. It has become so expensive because people want to use it to store value subjectively. And then lastly, I want to talk about cash flow. So cash flow is important if you talk about an investment, because the way that you would calculate the return on an investment is you would use the cash flow. So for example, for real estate, you use the cap rate. You take the net income and you divide it by the value of the property and that would give you a cap rate. And you generally want to have a cap rate anywhere between three to 10 in an investment project for it to be feasible. But Bitcoin is not an investment. It's money that you save. That is very important to understand. And the reason why real estate

Starting point is 00:57:01 is so valuable is also because it is used as money. So the reason real estate is so valuable today is not because it is such a great investment. It is because people literally use it as money and it was inflated through current city basement, right? So once you understand that real estate is so valuable, not because of its cash flow, but because it is used as money. And then you understand Bitcoin is better money because it is scarcer, it's highly liquid, it's mobile, it's more divisible, it's permissionless, it's programmable, right? It's purpose-built money for the digital age, you understand that Bitcoin is superior money to real estate and therefore a superior savings tool.

Starting point is 00:57:43 I can tell you've responded to that a few times. Yes, I did. I did actually. And I wrote an article about it because I was asked that question so much, so many times, I just had to give a proper answer. I love it. Leon, this is a blast. You always come with the fire.

Starting point is 00:58:02 And I appreciate your time and expertise in this particular area. I think it's really important because I think for the last 40 years, the number one thing to preserve your buying power has been real estate. And I think that going back to your chart, the first one that we looked at with the M2 growth rate versus the growth rate of real estate prices and things like that, people are looking at it. And when you lever it, you're getting outsized returns and you're able to outperform that debasement rate better than pretty much anywhere else out there, at least the last 40, you know,

Starting point is 00:58:36 up until 2020. And I just think that we're at this really massive transition point and trend change. And you are one of the few people that are out there so eloquently explaining it to people. And the more people that can kind of come around to understanding the nuance of your thesis and your arguments, I think is just going to help out so many people. So I appreciate you coming on and sharing your time and wonderful things. If you want to give people a handoff, I know you have a website where you're sharing some of your information. Is there anything else that you want to highlight for folks? First of all, thank you for, seriously, thank you for your kind words and for inviting me again.

Starting point is 00:59:12 I hope I was able to explain and lay out how the real estate industry can benefit from Bitcoin because it's a lot of information that at first it can be a little bit too much sometimes. But what I try to do, I try to digest these issues into a monthly newsletter. So you can find me on Substack, Leon.combe.combe.combe.combe.combe.com where I share my writing on Bitcoin real estate and philosophy and ethics. And hopefully by either Q1 of next year, but I think it's going to be Q2, I have a book ready by the name of digital real estate, which is going to explain how Bitcoin is going to affect the real estate industry

Starting point is 00:59:48 by being pristine collateral for lending and near perfect store value, how the real estate industry can benefit from this, and what the effects of interest rates, credit markets, the housing market and society as a whole will be. Wow, I can't wait for that. That's awesome. Okay, we'll have links to all of that in the show notes. Leon, thank you for making time, sir. Thank you. Thank you for listening to TIP. Make sure to follow Bitcoin Fundamentals on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com.

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We Study Billionaires - The Investor’s Podcast Network - BTC199: Bitcoin's Collateral in Real Estate w/ Leon Wankum (Bitcoin Podcast)

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