Bitcoin vs. Real Estate: Which Will Come Out on Top?

by | BiggerPockets.com

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.

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.

Related: Bitcoin or Real Estate: Which is the Better Investment?

Arguments in Favor of Both Assets

Bitcoin

  • 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

  • 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.

Related: Is This a Bitcoin Bubble? An In-Depth Look at the Bitcoin Phenomenon 

Conclusions

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?

Comment below!

About Author

Gus Ross

Gus Ross is a managing member of Ownup Capital. An accredited investor with goals of expansion, Gus is always evolving strategies for acquisition and analysis of properties throughout the country. An avid reader and seeking to learn and grow everyday, he has ultimate goals of philanthropy, business, and personal growth. A visitor at local REIA meetings, he is always seeking to network and meet investors and align goals and interests.

Ownup Capital

17 Comments

  1. Erik Whiting

    Well said, and I appreciate you making a comparison among 3 asset types. I hesitate to call BitCoin and cryptos an asset not from ignorance of the tech or concepts, but simply because it is so volatile. I think we almost need to come up with a new word for it because I can’t think of anything that sky rockets and plummets that quickly, all based on nothing more than person A buys it for absolutely no other reason than they don’t think it’s reached the top yet, and that guess is based on nothing at all. On Nov 30 it was around $10K. It went up to around $20K, now sitting in the low $14Ks. All in about a month’s time. Real estate, stocks, gold, tulip bulbs…nothing really comes even close! Maybe we call it “gasset” (gambling asset)?

  2. John C.

    “A gambling habit generally leads to an empty bank account.”

    You hit it on the head. You may win with this gamble. But over a lifetime, that habit will have you gambling on many other such things, most of which you will not win.

  3. Alan Firth

    Gus thanks for the article. I’m sure you’d agree that investing in real estate without doing your research and due diligence is a recipe for disaster. The same is true with cryptocurrencies. Having done the research and leaning on the expertise of my clients for my 9-5 which happen to be chief technology officers at many of the top hedge funds I was turned on to Ripple and their native digital asset, XRP in July of this year. Turns out it’s the best performing asset of any kind for 2017, I wish I knew about it in March. I’d argue the reason for this is that people are just beginning to understand its UTILITY! That’s the key. Bitcoin doesn’t have any inherent utility other than maybe a alternative store of value to gold? Ripple and XRP are creating the “internet of value” where money flows as freely as information does today globally with almost no friction. They have a great team, vision and the support of global government entities. They are the only firm building relationships and offering amazing solutions at the institutional level. Furthermore, they are decentralized despite the ignorance amongst the bitcoin evangelists. It’s a game changer. And there are other digital assets out there with unique utility you just have to do your research and look way beyond bitcoin. Happy New Year!!!!

    • Gus Ross

      Alan, your point is a valid one. Cryptocurrency assets are a bit too volatile in swings for my taste right now and I haven’t done enough research into the difference in technologies to be intelligent on the topic. I model my behavior and investing after very conservative figures like Warren Buffett who recently said this in the Washington Post about bitcoin:

      “There are basically two kinds of assets,” elaborated Warren Buffett, who was in his office and not buying bitcoin the day I called. “One you look to the stream of income it will produce; the other you hope like hell that someone will pay you more for it.” The second type is inherently speculative; it includes gold, although gold at least has value as jewelry. It most definitely includes bitcoin.

      After taking a brief glance at Ripple a second ago I noticed the price fluctuation over the last 72 hours has been +/- 40%. Those volatile swings are just not in my investing profile. This is not an indictment on investing in the cryptocurrency, but moreso an observation that I am willing to forego substantial reward in exchange for not accepting substantial risk. It is not in my wheel house but certainly can be in others’. I manage risk very very delicately. I wish you the best in your investing and please keep me posted on your progress with Ripple.

  4. Cathy Epp

    “Bitcoin is not backed by a tangible asset.”

    Neither is the American Dollar.

    Whales on the exchanges (people from wall st who are now interested in bitcoin) are telling major news outlets to tell their viewers that bitcoin is in a bubble (cnn, msnbc ect..). They are trying to scare regular people so they all sell their bitcoin and give it all to wall st which is why bitcoin has slid to $13k and isn’t over 20k right now.

    The propaganda is starting to work.

    If you think this isn’t happening, you are lying to yourself.

  5. Eric Gabriel

    THE OPPORTUNITY
    You can invest in Bitcoin without owning any. Currently the cost of BTC in the USA is $14,000 and in Korea it’s $18,000. Korean limits on wiring money out of the country have created a limited supply of new bitcoin coming into the market. The opportunity exists because $50,000/year is the limit per person to be exact.

    I’ve found a legal way to get the money out of Korea which isn’t included in my process chart below. I can move $100,000/week.

    THE MATH
    Profit Margin/Premium:
    14,000/18,000-1 = 22%

    ?Expenses:
    $100,000 x 6% = $6,000 Fees

    Income:
    $100,000 x 22% = $22,000 Gross.

    Net Income Before Taxes:
    $22,000 – $6,000 = $16,000 Net.

    Sometimes it takes longer, like right now since it’s new year’s day the banks are closed so I have to wait for my $115,000 that I sent on Friday to get credited to my exchange account.

    I’m guessing I’ll have a huge tax bill this year. I haven’t had that problem before since my 7 units in Portland have all the depreciation and writeoffs I need.

    I you are interested in my arbitrage process, don’t hesitate to reach out. I’m also looking for mobile home parks in and around North Carolina where my family will call home soon

  6. Brett P Swarts

    Well said Guss. Thank you for sharing! Having an exit strategy to sell at the opportune time and defer the capital gains taxes is an important next step in the decision to invest in real estate or bitcoin/ripple/cryptocurrency. I’m curious what your and @alanfirth strategy is if your cryptocurrency does grow to a high value?

  7. Eric Carr

    Nice work comparing these two very different assets that solve very different issues. The benefits of RE are clear and RE will ALWAYS be valuable. As far as the dollar, fiat currency goes, I just don’t know – trust is what keeps it valuable and the government can print as much as it wants. I want to add to the intrinsic value argument you make by asking what the intrinsic value of the internet is? I mean to make a point that no one owns the internet and it might be impossible to set a money value on it – but we know it’s worth a lot since companies like Google and Amazon and even BP exist because of it. The internets value is due to it’s utility, it solves problems, and people use it. I believe the same will go for crypto. Understanding the technology/network behind each of these currencies are critical to understanding how valuable they can potentially become – there are over 1000 and you can believe many are getting into the game of offering crypto to make a quick dollar and pull out. I believe that 95% of the ICO’s will be gone eventually. Japan has legalized bitcoin and China banned it (they have banned most of the internet in the past) and to me each of these are good signs. Japan has always led the future in many ways and China resists it. Bitcoin could solve a lot of issues for countries with hyper inflation like Venezuela, Argentina, India. I see a potential for Bitcoin to reduce the amount of currencies across the world. The world is becoming increasingly global and technological. Also look at developing countries, they are skipping the old infrastructure of landlines and going straight to cell phones – as an example. If we were to develop currency today I doubt it would be paper dollars. Shakespeare said, “What’s past is prologue”. We’ve seen the car take over for the horse and cart, electric elevators take over for the concierge, Uber, Lyft, AirBnB, – the internet is changing everything. As far as the issues go with crypto, I fully agree, but I also remember the arguments people had against Amazon in 1994, the internet in it’s early, stages (think about watching a video over a 13k modem, tying up your phone line, and the security breaches), and the MP3 – the sound wasn’t great, but now, who shops at a record store? Who owns physical media? Remember when Paul Krugman said, By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s. I believe that digital is the way the world is going, we will also see these changes occur with Blockchain.

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