While you are probably busy focusing on the day-to-day tasks of making money and investing, our guess is that at the very least you’ve heard the word ‘Bitcoin’.
Bitcoin is a crypto currency, a digital medium of exchange designed to act as an alternative currency to fiat printed money such as the U.S. Dollar, Japanese Yen, or Euro. It exists only on the internet and is backed by a decentralized technology called blockchain that is used to secure counterparty transactions, and verify transactions between two parties.
In one sense blockchain serves the same purpose that a brick-and-mortar bank does with fiat currencies. Except the blockchain technology cuts out the need for a bank.
Is Bitcoin Better Than Real Estate?
When bitcoin first launched in 2009 it was worth pennies. Now, at the time of this writing, a single bitcoin is valued at almost $7,000, making ‘bitcoin billionaires’ out of those early purchasers who were astute enough to buy and hold.
In fact, over the past 12 months the value of a bitcoin has skyrocketed by over 800%. There is no other asset class that has performed like this over the short- or long-term.
Although we have yet to see this question posed in the mainstream media, prudent investors should understand the arguments both for and against investing in bitcoin rather than tangible assets such as real estate.
Why Buy Bitcoin?
The arguments for buying bitcoin fall into three general areas:
- The fact that bitcoin has increased by over 800% in value during the past 12 months leads buyers to believe that bitcoin will only go up. This is similar to the mindset when investing in the FANG stocks or the NASDAQ.
- Because bitcoin is detached from the fiat currency systems, it can not be manipulated by the various reserve banks around the world. While bitcoin isn’t actually backed by any tangible asset, buyers of bitcoin also point out that neither is the U.S. Dollar, except for the ‘full faith and credit of the U.S. government.’
- There is fixed amount of bitcoin. This is where the comparison to real estate is strongest. Technically almost miniscule amounts of new bitcoin can be discovered through a process called ‘mining’. This is an extremely expensive and time consuming procedure, and is similar to more land being ‘created’ when a river or lake permanently recedes.
Why Bitcoin Isn’t Like Real Estate
While it’s difficult to argue against an +800% return in one year, comparing buying bitcoin to investing in real estate is imprecise.
Here’s why:
- Unlike real estate, the value of bitcoin is extremely volatile and prone to very large price drops over a short period of time. For example, during a three-week period in September of this year the price of bitcoin dropped by about 25%.
- While bitcoin is currently detached from the world fiat financial systems, it is slowly but surely gaining acceptance. This may add legitimacy, but it also signals an increasing amount of pending government control.
- Claiming that there is a fixed amount of bitcoin is technically true, but there are also numerous other crypto currencies that exist. Bitcoin Cash, Bitcoin Gold, Litecoin, Ethereum, Namecoin, Dogecoin, and Primecoin are just a few examples.
Bitcoin vs. Real Estate
But the biggest distinction between bitcoin and real estate is that bitcoin does not generate cash flow or a net operating income. The perceived value of bitcoin or any other crypto currency is based solely on appreciation.
By contrast, real estate appreciates over the long-term, generates an income during the holding period, and also offers numerous tax advantages to the real estate investor.
Single family homes, multi family apartments, office buildings, industrial properties and more are all tried and true methods of making money and preserving wealth from one generation to the next.
Real estate is an asset class that can be seen and touched, and is one that doesn’t run the risk of evaporating into thin air.
