On Monday, I talked about bitcoin and the real estate cycle. It’s the first part of a series explaining how money is the accepted means of settling credit balances.
On Wednesday, I discussed the relationship between bitcoin and banks.
Today, we’ll get to the final part of the series and have a big-picture overview of how bitcoin fits into an economic law that governs all economies and assets, both traditional and digital.
The Most Important Economic Law Nobody Understands
If there’s any concept even more misunderstood than money, it is economic rent.
It sounds like an obscure economic term, but it’s the force that binds our economies together. It plays a role in economics as gravity does in physics.
Economic rent is the surplus that is generated around the possession of an asset whose value is derived not from its input to the cost of production but as a gift of nature (as fertile land or the electromagnetic spectrum), the presence of a large community (such as urban land), or licenses (such as taxi medallions or banking licenses).
In other words, it’s the profit received from “owning” something other than “operating” it.
As the community grows and demand for scarce assets increases, its value goes up exponentially, particularly when banks lend against it.
There are no limits to how high a rent-based asset can go up in price other than how badly people want it because higher prices will not create more supply.
The real estate cycle is driven by speculation in economic rent, principally land values, which is by far the most valuable asset class around.
In 2020 (the latest comparable data available), the global real estate market was almost three times bigger than the global market for equities.
But rent doesn’t only apply to land.
It applies to digital assets as well.
The cost of mining bitcoin is much lower than its traded price – this difference is essentially pure economic rent.
Assets that generate rent are the ones most heavily speculated in, which is one of the reasons for the enormous hype surrounding bitcoin and the wild surges in price.
There Is Nothing New Under the Sun
Every real estate cycle, particularly the second half which is where we are now (see the chart below), ends up bringing a new generation of investors into the market.
In addition to cryptocurrencies, you also have the Robinhood generation that wants to take on Wall Street, using low-cost trading platforms and social media.
But new hype in investing is not unique to this cycle.
For example, in 1918, investing in the stock market was something that only 2.5% of U.S. households did… but by the peak of the cycle in 1929, this had increased tenfold.
New money flowing into markets drove the great Roaring Twenties bull market to its peak. But the second half of every cycle involves new investors jumping into the market, usually through the wish to participate in the profits arising from new technology.
In the UK of the 1890s, the new technology was the bicycle, and shares in cycle companies experienced a bubble.
In the 1840s, in the UK, it was railway stocks (similarly in the 1850s and late 1860s in the U.S.).
In the 1820s, it was canal stocks.
The technology changes, but the same dynamic applies to the second half of every real estate cycle.
These movements can be profitable, but ultimately you need to know when things have gone over the top, particularly in the year or two before the anticipated peak.
This is where knowledge of the real estate cycle is so valuable.
My readers know that you can use the real estate cycle to time your investments in the stock market.
You can use your knowledge of the real estate cycle to identify when the greatest speculation is taking place because, for all the attention given to the new technology, the greatest boom will be real estate-related (though it will not necessarily be obvious to many).
I have long said that the boom we will experience in the second half of the present cycle in the 2020s will be the biggest in history.
And bitcoin, I suspect, will ride the vanguard of that boom because the speculation of the second half of the cycle is all about chasing the economic rent.
Bitcoin at $200,000 – or whatever it is people are predicting these days – does not seem to be beyond the realms of possibility after all.
Just remember that after every boom, there is always a bust. The bigger the boom, the bigger the bust.
There is nothing new under the sun.
Editor, Cycles Trading with Phil Anderson