Investing in the nuts and bolts.
The economic infrastructure of the future.
I believe bitcoin mining may be the real estate of the future, but better.
Real estate, for all its problems, is one of the best methods of building wealth that exists. The margins are thin. The maintenance is high. And the number of people you have to deal with, from the financial institutions to the renters to the buyers to the sellers, gets messy. But it works.
Also, it’s extremely easy to make a twenty thousand dollar mistake that turns a profitable deal into an unprofitable one. The redeeming factors of real estate that I can see are its relative permanence and its leverage.
A house doesn’t last forever, and it must be maintained constantly, but it’s still more permanent than most investments. Investors are in a constant battle with inflation, time, and entropy.
Fiat money tends to reduce in value over time, and all things tend towards chaos over time. Buying and renting a house is a very good way to put up a fight against these forces, as, even if a house doesn’t increase in value, it usually at least stays the same, which means its price raises as the value of the dollar falls. And the battle of entropy is constantly fought by both the owner and the tenant. Or at least by the owner, funded by the rent from the tenant.
And the leverage on a house is great. This is one of the fundamental concepts that investors like about a house. Taking out a loan at 4% interest isn’t an option for most people unless they’re doing it for a house or maybe a car. And a car is usually a terrible investment due to how badly a car deals with entropy.
A person can take out a loan for $120,000 while only putting up $20,000 of their own money, for example, on a house, at 4% interest, and then pay that loan off over a thirty-year period. And, possibly the most amazing part, the house can drop in value at some point during that time due to market forces, and the house won’t get repossessed as long as the owner continues to make payments.
If the owner had made the same investment in the stock market he would be in danger of getting a margin call when the market goes down and his investments drop in value, having his shares sold without him having a say, and losing a lot of money.
The large amount of money one is able to borrow, the low interest, and the lack of a margin call are the strengths of real estate investing.
A loan on equity margin might be 8% percent or higher. It could be as high as a credit card interest rate in some circumstances. Bitcoin collateralized loans are improving, but they’re also high and in danger of margin calls.
But the cool thing about real estate mortgages is that it isn’t really the fact that it’s real estate that makes the loan a better loan. It’s because real estate is a physical thing. It’s a piece of physical infrastructure that isn’t going away. Again, real estate is a physical item fighting the battle against entropy.
Institutions are more willing to give out loans at better rates for things that exist concretely in the real world. Just like the car loan as well.
There just aren’t a lot of physical items that are accessible to the average consumer and consistently good investments.
Enter bitcoin mining.
Bitcoin mining is done by a computer, a physical machine, that requires infrastructure, a power source, maintenance, and a location.
This makes it slightly more inconvenient than doing something as simple as buying a cryptocurrency or an equity. But it also makes it more appealing to a potential lender.
Permanence lowers interest rates because it adds security.
At the moment, it’s rather difficult to get into the bitcoin mining space. But people are working to democratize it and make it more accessible.
I don’t believe the average person will be buying property in Nebraska and creating their own container storage setup and packing it with bitcoin miners. But I do believe it will become more and more possible to get an equity stake in those operations, and the lending terms will make it a leveraged investment with less risk than using leverage in the markets and provide a predictability that will be much closer to that of real estate.
I have not yet gotten involved in this space myself. But I’m working towards it, learning about it, and talking with someone actively working to make it more accessible.
I’m very interested to see where it goes.