Bitcoin vs. Real Estate: Which Will Come Out on Top?
Bitcoin is the hottest word on the markets right now. With a meteoric rise, bitcoin has taken the world by storm. Paul Moore previously wrote a great article that I’d like to add to from a technology and macro-economic perspective.
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Investors must understand that the underlying technology, referred to as blockchain, is going to disrupt and change the world. From banking to real estate, it will alter the very fiber of how transactions are conducted. Bitcoin, a cryptocurrency, is simply one of the first movers that runs on this blockchain technology. One of the largest problems I’ve noticed is a conflated discussion surrounding bitcoin and the technology it uses. They need to be understood as separate entities. The technology will disrupt markets. However, the jury is still out on the cryptocurrency.
Though I bought bitcoin earlier in the year, I exited for gains and missed the majority of its run. Bitcoin holdings were a fraction of what my real estate holdings are (less than 1 percent). I currently don’t own any. At the end of this article, I will explain why I bought bitcoin in the first place.
As a disclosure, this is not intended to be financial advice. Cryptocurrencies are an asset class new to the bright lights of the investing world, and there is no shortage of opinions. This will be an objective view into the arguments for and against bitcoin.
Arguments Against Bitcoin
The most prevalent criticism of bitcoin: It’s a bubble.
That statement echoes around the financial markets across countless analysts’ articles. An asset bubble can be defined as when the price of an asset exceeds the intrinsic value of that asset. Any asset that has 1,000 percent appreciation in a short window of time, without any rational explanation, can easily fit this definition. The unreasonably sharp move for bitcoin to the upside has been based highly on speculation rather than fundamentals. Historically, these stories do not end well.
Bitcoin is not backed by a tangible asset.
When asked what intrinsic value bitcoin represents, there are often shrugs. The ability to pin tangible value to bitcoin (or any cryptocurrency) is a challenge. Currently, the market for bitcoin is based on perception and trust in a system with many unknown variables. Trust can erode, and when it does, it happens quickly with extreme volatility.
Storage and recourse are major issues.
Bitcoin storage is admittedly a problem, even according to proponents of the cryptocurrency. Digital currencies are stored in an electronic wallet or on hardware devices. Both have vulnerabilities. The technology is improving, yet even the advocates for cryptocurrencies admit this is an issue that needs vast improvement. Since bitcoin is a self-sovereign currency and not backed by any government, the recourse for having a digital wallet broken into is questionable at best. This was demonstrated when the most publicized hack, the Mt Gox exchange, lost its account holders’ funds. There was no central authority to act on behalf of the victims. It is the equivalent of having no police to call after a burgalry. Another hack was announced as I finalized this article in South Korea. Yikes.
Government intervention is a potential danger to bitcoin’s value.
Foreign governments have hinted that increased regulation is on the horizon. The SEC has already been injected into the conversation because of the media hype. One of the foundations of bitcoin is that the decentralized nature of the cryptocurrency disallowed central bank intervention and regulation. Becoming an adversary of government action is ill advised.
Arguments in Favor of Both Assets
Bitcoin is based on math, algorithms, and computation.
The peer-to-peer decentralized structure in place for the cryptocurrency is a systemic protection from fraud and corruption. Thus far, it hasn’t been hacked (this excludes the exchanges on which it is traded). Bitcoin’s technology is an open-source system to the public, adding to its transparency.
It is globally governed by the economic principle of supply and demand in a decentralized peer-to-peer network.
Furthermore, there is a suggested cap on supply. As the supply of bitcoin grows, the complexity of its computations grow in tandem and will ultimately limit the production of additional supply in its market. A market with limited supply and steady demand generally leads to increased prices.
Bitcoin is not susceptible to inflation via additional printing.
Bitcoin has the inherent benefit of being protected from central bank policy errors because, well of course, there is no central bank. Also, it has been proposed that the cryptocurrency is also a hedge vehicle against inflation, similar to gold (it has been annointed by some crowds as gold 2.0).
Real estate is backed by tangible asset value.
The land and/or structure that backs the value of real estate provides a necessity of life – shelter. Great businesses tend to provide life’s necessities. Everyone in the world needs shelter. Dating back to feudalism, the value exchange involved the trade of land and protection. Ultimately, owning land has stood the test of time.
Real estate is a proven hedge against inflation and a great diversification asset.
As inflation rises, so too do rents and housing values. In an inflationary environment, real estate assets react proportionally to inflation.
Real estate has incredible tax benefits and cash flow incentives.
The tax benefits of the mortgage interest deduction and depreciation are some of the most powerful available in the tax code. They incentivize investment, and it is an investor’s fiduciary responsibility to his investors to explore every avenue of the tax code to maximize its advantages.
Investing in real estate traditionally outperforms most asset classes in risk adjusted returns. When compared to bitcoin, it is unequivocally the safer investment (based on historical data). Bitcoin and other cryptocurrencies are highly speculative assets with enormous risks and rewards. I based my decision to dabble in bitcoin with full knowledge of both. At the time, bitcoin’s advantages of becoming revolutionary posed a great enough reward to dip my toe in the water. Currently, I am open-minded but skeptical. I have not closed the door on jumping back in.
Given the facts, the risks associated with Bitcoin are clear. An investor can lose their shirt as fast as they’ve accumulated crazy returns. The potential reward of becoming a viable currency may give enough upside to merit the understood gamble. But it is a gamble. A gambling habit generally leads to an empty bank account.
Ray Dalio, Warren Buffet, and Howard Marks would all agree that consistently making risky investments inevitably leads to financial doom. If there is nothing else to take away from this article, remember this. In the end, if asked which I’d choose to accumulate wealth over time—the answer is (and should be) resoundingly real estate.
Where do you stand on this debate?