The City is our Bitcoin.

Regardless of how you feel about investors in digital assets, you'll find it interesting to understand how they work and how much they resemble the real estate market.

The original (Spanish) version of this post can be found here.

Bitcoin operates on a curious mechanism, almost like a socioeconomic experiment.

Sixteen years ago, under a pseudonym—and, to add to the legend, still anonymous—a person invented a system to create a deflationary digital asset.

Most assets, whether physical or virtual, have an inflationary supply: demand drives efforts to push the limits of production. For example, when the entire world suddenly craves avocados, technology and human ingenuity emerge to make it possible to grow them in more places, even where it was previously uneconomical due to factors like land costs, water availability, or transportation.

Bitcoin’s software design imposes a hard limit on the number of units that can ever be produced. We already know the maximum number of bitcoins that will exist in the future: 21 million. No matter how much effort is applied, more cannot be created.

Instead of being planted like avocados, bitcoins are “mined.” You have to set up a computer to perform a trivial task, but one that comes at a cost (it uses your computer’s processor for a certain amount of time).

Additionally, the amount of effort required to mine a bitcoin changes based on the number of miners in the system. When prices rise, more miners join, so over time, the system makes it increasingly difficult to obtain a new bitcoin (and therefore more expensive). Every 216,000 bitcoins, the system halves the number of coins available for mining.

Another defining characteristic of Bitcoin is that it operates as a decentralized system where users collectively maintain a single “ledger,” but one that is replicated across millions of computers worldwide.

This means that Bitcoin’s limits are not physical, which is why they cannot be altered. Unlike avocados, which may one day be artificially printed, Bitcoin's limits stem from a contract between users. And getting all users to agree to change that contract is impossible—especially because increasing the bitcoin supply would go against the interests of those who already own it.

That’s why its supporters argue that Bitcoin will always remain valuable: it is the only asset in existence that cannot be expanded by any means.

As a result, many people believe that Bitcoin will never lose value and that it is an excellent investment asset.

(Everything I’m describing has its critics, but that’s not the debate I want to engage in. What interests me is Bitcoin’s underlying philosophy.)

Well, housing in major cities behaves in exactly the same way as Bitcoin, perhaps making it the only deflationary physical asset.

The reason is that the number of homes that can be built in a city is limited—just like Bitcoin—not by physical constraints, but by a social contract that is (almost?) impossible to change.

This social contract has several components:

• The physical boundaries of the city, which are a political agreement with neighboring cities.

• Urban planning regulations, which determine what can be built on each plot.

• The current ownership of land, which—like Bitcoin—is fragmented among millions of small property owners who are not necessarily economic agents in a perfect market. In fact, they don’t have to behave as economic agents at all, because housing is much more than just an investment. Moreover, they have no interest in seeing their investment depreciate due to an increase in supply. The horizontal division of property functions as a decentralized network.

The parallels with Bitcoin are extraordinary. Urban planning regulations are like Bitcoin’s protocol, defining how new coins can continue to be mined. Current property owners function as the nodes that make up the network.

The physical boundaries of the city are equivalent to the hard limits implemented by Satoshi (the 21 million cap). In this analogy, the square meters of urban land are bitcoins.

Just like in Bitcoin, the more a city is built up, the harder it becomes to build more. There are fewer available plots, fewer buildings with a single owner willing to sell, and fewer properties with untapped development potential (or profitability). Even in the unlikely case that zoning laws were changed to allow unlimited building heights, those new taller buildings would again be owned by private individuals whose interests would be against further increasing supply.

Similarly, just as Bitcoin has a limit on how many times a token can be divided (the satoshi), the housing market also has a hard floor: the minimum square meters a person needs to live.

This is why urban land in major cities has become the go-to asset for two-thirds of the world’s wealth. It’s a massive Bitcoin-like system.

What determines whether Bitcoin continues to appreciate? Just one thing: people’s belief that it will keep increasing in value. The same applies to cities: real estate prices are based on the assumption that a city will continue to attract people, investment, and talent in the future.

And another thing, Bitcoin has a fundamental issue: it is extremely unfair to those who didn’t get in early. In the first few years, 450 BTC could be mined in just an hour and a half. But when Bitcoin undergoes its next halving on April 20, the same amount will take a full day to produce.

Children born today will have a much harder time acquiring a Bitcoin than their parents did.

The same is true for cities. Those who moved to a city while it was still growing had the chance to secure their "urban bitcoins" at bargain prices. Meanwhile, those of us who were too young to buy at the time must now put in 20 times more effort to get the same thing—or pay an outrageous premium to those willing to sell, which isn’t many.

Experts say that the only way to make Bitcoin less scarce is to replicate it—copy the code and start a new network, issuing large amounts of coins daily so that another group, perhaps another generation, can claim them.

Maybe the same applies to cities.

If you want to learn more about Bitcoin, I recommend this presentation and everything Miguel Vidal shares on Twitter (though, for now, it's in Spanish).