Introduction
We live in a highly digitalized world, but most of humanity still uses physical goods to store value. The most used store of value in the world is real estate. It is estimated that approximately 67% of global wealth is held in property. Recently, however, macroeconomic and geopolitical headwinds have highlighted the weaknesses of real estate as a physical store of value. What to do if a war breaks out? What happens if a home that was used as a store of value is destroyed?
The Vulnerability of Real Estate
In German, real estate translates to "Immobilie," which literally means "to be immobile." Owning real estate creates a local dependency that can pose a problem in a world of ever-increasing conflict and radicalization. In the event of war, you cannot take real estate with you and it can be easily destroyed.
This may sound like a dystopia, but I believe that if you are serious about long-term wealth management, you should consider the worst-case scenario and the possible global impact.
War And Destruction Of Wealth
Since the beginning of the 21st century, war has never cost humanity so much. Over 238,000 people were killed in conflict last year. Syria, Sudan, Ukraine, Palestine, Israel, Lebanon – the global sources of conflict are increasing. Some of these areas have already suffered massive destruction. There are no more properties there and the value stored in them has literally evaporated. It's hard to imagine the financial setbacks people have had to endure, apart from the suffering and grief that war brings.
Real estate is used as a store of value around the world, although there are some exceptions, such as Japan. With the threat of destruction increasing, the fruits of the labor of millions, possibly billions, of people are at stake. Alongside inflation and taxation, physical wealth destruction has historically been one of the greatest threats to overall prosperity. Already in ancient times, armies ruthlessly plundered cities and destroyed the residents' belongings.
Physical vs. Digital Store Of Value
Fortunately, with Bitcoin there is a solution to the threat of destruction of wealth stored in physical assets. As a digital, near-perfect mobile store of value, it is difficult to destroy and easy to move.
The introduction of Bitcoin in 2009 challenged the role of real estate as humanity's preferred store of value, as it represents a better alternative that allows people worldwide to protect their wealth with relative ease.
You can buy very small denominations of bitcoin, the smallest being 1 satoshi (1/100,000,000 of a bitcoin) for as little as ≈ $ 0.0002616 (on 2/12/2024). All you need to store it safely is a basic computer without internet access and a BIP39 Key generator — or just buy a hardware wallet for $50. In case you need to relocate, you can memorize 12 words, the backup (seed phrase) for your wallet, and "take" your bitcoin with you.
Digitalization
Digitization optimizes almost all value-preserving functions. Bitcoin is rarer, more accessible, cheaper to maintain, more liquid, and most importantly, it allows you to move your wealth in times of crisis.
Bitcoin is wealth that truly belongs to you. With the threat of war looming around the world, I believe it is better to hold wealth in a digital asset like bitcoin than in physical assets like real estate, gold, or art, which can easily be taxed, destroyed, or confiscated.
Property Confiscation
If we look at history, it is clear that physical stores of value have left people vulnerable to government overreach. A historical example is the expropriation of Jews in Nazi Germany. Unfortunately, these repressions were not an isolated case in history. It happens all the time. Many lost their property in Cuba when Fidel Castro took over, as Michael Saylor likes to point out.
These painful history lessons underscore the significance of safeguarding wealth in a digital asset such as bitcoin, which proves challenging to confiscate, tax, or destroy and easy to move.
Macroeconomic Changes
Additionally, shifts in the macroeconomic landscape can swiftly devalue real estate. Typically, real estate is purchased through a loan. Therefore, elevated interest rates translate to diminished affordability for financing, resulting in a decreased demand and subsequently lowering property prices. We can see this scenario playing out globally right now, the conjunction of increased interest rates and reduced demand is contributing to the decline in property values around the globe.
Bitcoin vs. Real Estate
Bitcoin is less affected by the problems of the traditional fiat financial system than real estate. Since it operates independently of the system. Variables such as interest rates, central bank decisions, and arbitrary governmental actions have limited influence on bitcoin. The price is predominantly determined by its supply, issuance schedule, and adoption rate.
Bitcoin follows a disinflationary model that implies a gradual reduction in its supply over time until a hard limit is reached in 2140. Approximately every four years, the bitcoin awarded to miners for successfully ordering transactions (every 10 minutes) are halved.
The upcoming halving, set for Friday, April 19, 2024, is expected to halve the block reward from 6.25 bitcoin to 3.125, which translates to a daily issuance of 450 bitcoin instead of 900.
Currently, bitcoin has an annual inflation rate of around 1.8%, which is expected to drop to 0.9% after the upcoming halving. After that, the inflation rate will be almost negligible. In addition, a large number of bitcoin were lost and we can expect that many will be lost in the future. The continuous decline in finite supply increases the deflationary pressure of the Bitcoin network. As more and more people (and machines) are using bitcoin, increasing demand is countered by decreasing supply.
This extremely strong deflationary movement cannot be observed in real estate. Although real estate is also scarce due to the limited supply of building land, there is no hard cap. New building land can be developed and zoning laws can, for example, enable the construction of higher floors.
Absolute Scarcity
For most, it is difficult to imagine the impact of a fixed supply on the price of an asset. Prior to Bitcoin, there was no concept of an inherently scarce commodity. Even gold possesses an elastic supply. Increased demand prompts more intensive mining efforts, a flexibility not applicable to bitcoin.
Consequently, with each halving event, signifying a reduction in supply, the price of bitcoin ascends and continues to do so perpetually. This permanent increase persists as long as there is a corresponding demand, a likelihood attributed to bitcoin's exceptional monetary properties.
This dynamic is expected to continue even in the midst of a global economic crisis. The supply of bitcoin will continue to decrease, and the price will most likely continue to rise. Due to the expected continued demand in times of crisis, as explained. Even inflation can have a positive impact on the price of bitcoin as it leads to increased availability of fiat currencies that can be invested in Bitcoin.
Conclusion
In a world marked by growing radicalization and a financial system undergoing a profound crisis, bitcoin emerges as a superior choice for storing value, especially during periods of macroeconomic fluctuations. The significance of bitcoin is anticipated to rise during these turbulent times, potentially overtaking real estate as humanity's preferred store of value in the distant future.
The aspiration is that an increasing number of individuals will recognize the advantages of Bitcoin, not only for wealth preservation but, in extreme circumstances, for securing their livelihood.
This is a guest post by Leon Wankum. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Frequently Asked Questions
What proportion of your portfolio should you have in precious metals
This question can only be answered if we first know what precious metals are. Precious elements are those elements which have a high price relative to other commodities. This makes them extremely valuable for trading and investing. Gold is by far the most common precious metal traded today.
However, many other types of precious metals exist, including silver and platinum. The price for gold is subject to fluctuations, but stays relatively stable in times of economic turmoil. It is not affected by inflation or deflation.
The general trend is for precious metals to increase in price with the overall market. However, they may not always move in synchrony with each other. For instance, gold’s price will rise when the economy is weak, while precious metals prices will fall. This is because investors expect lower interest rates, making bonds less attractive investments.
When the economy is healthy, however, the opposite effect occurs. Investors prefer safe assets such as Treasury Bonds and demand fewer precious metals. Because they are rare, they become more pricey and lose value.
You must therefore diversify your investments in precious metals to reap the maximum profits. Because precious metals prices are subject to fluctuations, it is best to invest across multiple precious metal types, rather than focusing on one.
How is gold taxed in an IRA?
The fair market price of gold when it is sold determines the tax due on its sale. If you buy gold, there are no taxes. It is not income. If you decide to sell it later, there will be a taxable gain if its price rises.
For loans, gold can be used to collateral. Lenders will seek the highest return on your assets when you borrow against them. This usually involves selling your gold. This is not always possible. They may hold on to it. They may decide to resell it. You lose potential profits in either case.
You should not lend against your gold if it is intended to be used as collateral. It is better to leave it alone.
Can I hold physical gold in my IRA?
Gold is money, not just paper currency or coinage. Gold is an asset people have used for thousands years as a place to store value and protect their wealth from economic uncertainty and inflation. Today, investors invest in gold as part a diversified portfolio. This is because gold tends do better in financial turmoil.
Many Americans today prefer to invest in precious metals, such as silver and gold, over stocks and bonds. Even though owning gold is not a guarantee of making money, there are many reasons why you might want to add gold to your retirement savings portfolio.
One reason is that gold has historically performed better than other assets during periods of financial panic. Between August 2011 and early 2013 gold prices soared nearly 100 percent, while the S&P 500 plunged 21 percent. During these turbulent market times, gold was among few assets that outperformed the stocks.
Another benefit to investing in gold? It has virtually zero counterparty exposure. You still have your shares even if your stock portfolio falls. But if you own gold, its value will increase even if the company you invested in defaults on its debt.
Finally, gold offers liquidity. This means that, unlike most other investments, you can sell your gold anytime without worrying about finding another buyer. It makes sense to buy small quantities of gold, as it is more liquid than other investments. This allows for you to benefit from the short-term fluctuations of the gold market.
Statistics
- If you take distributions before hitting 59.5, you’ll owe a 10% penalty on the amount withdrawn. (lendedu.com)
- If you accidentally make an improper transaction, the IRS will disallow it and count it as a withdrawal, so you would owe income tax on the item’s value and, if you are younger than 59 ½, an additional 10% early withdrawal penalty. (forbes.com)
- You can only purchase gold bars at least 99.5% purity. (forbes.com)
- Indeed, several financial advisers interviewed for this article suggest you invest 5 to 15 percent of your portfolio in gold, just in case. (aarp.org)
- (Basically, if your GDP grows by 2%, you need miners to dig 2% more gold out of the ground every year to keep prices steady.) (smartasset.com)
