Bitcoin vs Real Estate, Which is better for building wealth?
If you’re looking for a way to build wealth, like many other investors these days you may run into this interesting comparison: Bitcoin vs Real estate. Digging into this question requires an examination of these two assets’ contrasting features, benefits, and downsides. We will consider the various features of real estate generally and Bitcoin specifically. To be clear, we are discussing Bitcoin alone, and not blockchain technology or cryptocurrency in general.
Control
First we will consider control. Real estate investors exercise complete control over their investment and business plan. We have the ability to add value to our investments by doing physical renovations and making them more valuable to the marketplace – whether to a renter or a buyer who will pay more than in the past. That does go both ways, though. Not all business plans are profitable. Real estate investors with a bad plan can and do lose money.
Bitcoin investors have no control over the value of their investment. The value is solely determined by the market, which swings wildly based on unpredictable and uncontrollable factors. The only aspects of control Bitcoin investors can control are when they buy and sell and where their Bitcoin is stored.
Advantage real estate
Cash flow
Bitcoin investors can generate income by purchasing a mining rig. This is a computer that can be purchased for thousands of dollars and then used to run the complex calculations that mine bitcoin. These rigs may produce income if the price of bitcoin stays high, but there are many factors that impact the rate of return – financing is difficult to obtain, electricity is expensive, and the logistics to run a sizeable mining operation exceed what most investors are willing or capable to do.
Staking is a newer method that cryptocurrency investors can use to generate some income. The problem is that staking doesn’t exist for Bitcoin, as Bitcoin runs on a Proof of Work protocol, rather than Proof of Stake.
There are no guarantees that a mining rig that is profitable today will be profitable tomorrow. The price of Bitcoin is highly volatile, so a precipitous drop in its price could easily mean a money-losing mining rig. In that case, not only do the cash flows dry up but the mining rig massively loses value. After all, who wants a hunk of electronics that loses money every day?
Real estate produces cash flow, through rental payments in the case of rental property or interest in the case of real estate-backed loans. Rental property investors can also increase their cash flow returns with low-cost, long-term, non-callable leverage (aka mortgages).
Advantage real estate
Risk
Comparing risk in real estate vs risk in Bitcoin can be summed up by the following question: Of the two, which asset are you certain will exist in 10 years? The only responsible answer to that question is real estate. As long as there are people, we’ll need a place to live.
There are thousands of cryptocurrencies. Bitcoin was the first and is currently the most expensive crypto, but that fact is not set in stone. New innovations and market moves could certainly supplant Bitcoin in the market. All investments carry risk, but looking at the big picture we can see that real estate is a critical part of human society. Bitcoin is not and it is likely that it never will be.
Advantage real estate
Upside Potential
According to its proponents, Bitcoin has significant upside potential. Bitcoin is still in its infancy; many people believe it could become the future primary currency of world commerce, surpassing gold and even fiat currencies like US dollars.
Proponents of Bitcoin claim that prices could easily reach $100,000 or $1 Million per coin (although details on how they reach those conclusions are vague at best). For the sake of argument, let’s take them at their word for now and assume they’re right, that Bitcoin’s upside could be 10x or more.
Real estate investors tend to be much more conservative in their projections. Real estate investments are rarely, if ever, claimed to have such potential upside. Anyone claiming their real estate investment has such incredible upside potential would be laughed out of any serious convention of real estate investors. Real estate investors simply do not believe that kind of upside is possible.
Advantage Bitcoin
Leverage (Debt, Morgages, Loans, etc)
When used correctly, leverage (aka debt) can be a powerful tool for real estate investors. It can magnify returns and provide much-needed capital to help an investment property purchase.
Leverage comes with risk, of course, but when used appropriately it can greatly increase the potential return on an investment. Real estate leverage tends to be relatively inexpensive, long term, and much of it is not callable.
Leverage on Bitcoin is a different story. There are options, leveraged funds, and other strategies that can apply leverage to a Bitcoin-backed investment, but the costs are far higher and timelines much shorter than mortgages on real estate. Leverage on a Bitcoin investment is comparatively expensive and much higher risk than debt on real estate. Furthermore, the underlying Bitcoin does not produce cash flow to pay for the debt itself.
Advantage real estate
Conclusion
So which is the superior investment, Bitcoin or Real Estate? Based on the reasons outlined above, real estate is the superior asset class for most investors’ goals. Real estate produces cash flow, has an exceptionally long track record, investors can control their investment, and debt to buy real estate is relatively inexpensive.
Bitcoin may have greater potential upside (according to its most staunch proponents, who do not provide much evidence), but Bitcoin is far more speculative and unproven than real estate. It also does not address any of the inherent human needs that will always be a part of society.
Real estate, on the other hand, has a significantly greater track record and addresses all levels of Maslow’s hierarchy of needs. Additionally, it produces cash flow which Bitcoin cannot. For these reasons, we believe real estate is a far better vehicle for building long term wealth.
