{"id":94515,"date":"2017-12-06T14:30:48","date_gmt":"2017-12-06T21:30:48","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=94515"},"modified":"2022-12-19T09:00:33","modified_gmt":"2022-12-19T16:00:33","slug":"bitcoin-or-real-estate","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/bitcoin-or-real-estate","title":{"rendered":"Bitcoin or Real Estate: Which is the Better Investment?"},"content":{"rendered":"

Are you jealous that you\u2019ve missed out on bitcoin so far? Thinking about jumping in?<\/p>\n

There\u2019s some investment advice going around in circles of people half my age. And I admit that some of them are crushing it right now. That\u2019s an understatement, actually.<\/p>\n

\u201cYou\u2019ve gotta buy bitcoin!\u201d <\/em><\/p>\n

I\u2019ve had quite a few friends go down this path in the past year, and I’ve tried to ignore it. But when two of my friends decided to sink all of their time, talents, and treasures into cryptocurrencies, I had to take a look.<\/p>\n

For the few of you who are not familiar with bitcoin and hundreds of other cryptocurrencies, here is a brief summary courtesy of Coindesk<\/a>.<\/p>\n

What is Bitcoin?<\/h2>\n

Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren\u2019t printed, like dollars or euros. They\u2019re produced by people \u2013\u00a0and increasingly businesses \u2013\u00a0running computers all around the world, using software that solves mathematical problems.<\/p>\n

It\u2019s the first example of a growing category of money known as cryptocurrency.<\/p>\n

What Makes it Different From Traditional Currencies?<\/h2>\n

Bitcoin can be used to buy things electronically. In that sense, they’re like conventional dollars, euros, or yen, which are also traded digitally.<\/p>\n

However, bitcoin\u2019s most important characteristic, and the thing that makes it different to conventional money, is that it is\u00a0decentralized<\/em>. No single institution controls the bitcoin network. This puts some people at ease, because it means that a large bank can\u2019t control their money.<\/p>\n

Who Created It?<\/h2>\n

A software developer called\u00a0Satoshi Nakamoto\u00a0proposed bitcoin, which was an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.<\/p>\n

\"bad-reputation-press\"<\/p>\n

\u00a0Who Prints It?<\/h2>\n

No one. This currency isn\u2019t physically printed in the shadows by a central bank unaccountable to the population and making its own rules. Those banks can simply produce more money to cover the national debt, thus devaluing their currency.<\/p>\n

Instead, bitcoin is created digitally, by a community of people that anyone can join. Bitcoins are mined\u00a0using computing power in a distributed network.<\/p>\n

This network also\u00a0processes transactions\u00a0made with the virtual currency, effectively making bitcoin its own payment network.<\/p>\n

Note: There is much more I could say about cryptocurrencies, but that is not the purpose of this post. <\/em><\/p>\n

One of my friends first heard about bitcoin in 2010.<\/p>\n

\u201cIf I would have invested just $500 in it then, it would be worth well over a billion dollars today!\u201d <\/strong><\/p>\n

This is certainly compelling. Check out this chart:<\/p>\n

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It\u2019s honestly hard to not be jealous of those who caught this trend early on. And it is tempting to jump into this investment class.<\/p>\n

But wait. Is this really an investment class? Or a speculative swing for the fences?<\/p>\n

Related: Is This a Bitcoin Bubble? An In-Depth Look at the Bitcoin\u00a0<\/em>Phenomenon\u00a0<\/i><\/a><\/p>\n

Sound Investment? Or Vegas Crap Shoot?<\/h2>\n

As someone who has been a serial entrepreneur and investor for decades, I\u2019ve come to delineate investing and speculating a bit differently than some. Here\u2019s my loose definition for the purpose of this discussion:<\/p>\n

Investing<\/strong>: If you\u2019ve done a thorough evaluation, and you\u2019re reasonably sure your principal is safe\u2026 and you have a chance to make a profit\u2026 you are investing.<\/p>\n

Speculating<\/strong>: If you are \u201cinvesting\u201d in an asset that has uncertain protection of principal\u2026 and you have a chance to make a profit\u2026 you are speculating.<\/p>\n

This concept was clarified by Benjamin Graham and David Dodd in their 1934 book Security Analysis<\/em>. I\u2019ve discussed this in a previous article<\/a>.<\/p>\n

Though they were focused on stocks, their theories applied to all types of assets. Graham and Dodd said, \u201cAn investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.\u201d<\/p>\n

Paul Samuelson, first American winner of Nobel Prize in economic sciences, said:<\/p>\n

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” <\/strong><\/p>\n

It sounds like I\u2019m being pretty hard on speculators. That\u2019s actually not my intent. It\u2019s fine to speculate. As long as you’re clear that that is what you are doing.<\/em><\/p>\n

I interact with a lot of successful investors, however, and most of them avoid speculation like the plague. It\u2019s one of their key criteria.<\/p>\n

How Do I Know if this Investment is Investing or Speculating?<\/h2>\n

I\u2019m glad you asked. It really comes down to analyzing the risk versus the return. Thankfully, someone has quantified that for us.<\/p>\n

Nobel Prize winner William F. Sharpe came up with a formula to quantify the return versus the risk of an asset class in 1966. It was later called The Sharpe Ratio. <\/em><\/p>\n

The Sharpe Ratio is the average return per unit of volatility: A numeric representation of the return divided by the risk.<\/p>\n

An investor who can accurately foretell the future can ignore this ratio. He or she would be better off picking the next Snapchat or cryptocurrency, finishing off a few years in corporate America, then retiring to Maui.<\/p>\n

Assuming you are not in this class of prophetic investors, you\u2019d best be cognizant of both<\/em> the risk and return of your investment.<\/p>\n

So what does the Sharpe Ratio tell us about the various major asset classes? Take a look:<\/p>\n

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 <\/p>\n

Sharpe Ratio Source: Calculated using property and private equity returns obtained from NCREIF property index. Stock returns obtained from Yahoo.com. Average one-year T-Bill obtained from FRED (Federal Reserve Economic Data)<\/a><\/em><\/p>\n

I\u2019m particularly passionate about multifamily real estate. So when I saw these figures, I wanted to know exactly how multifamily stacks up against the other asset classes in this chart. The numbers say that multifamily and retail are:<\/strong><\/p>\n