In recent conversations with fellow investors the question has come up on several occasions about whether the recent hot streak in cryptocurrency makes it a better asset class to invest in than multifamily real estate in 2021. This is a serious question that cannot be easily dismissed. Recent headlines of newly minted cryptocurrency billionaires such as Alameda Research’s 29-year-old MIT grad Sam Bankman-Fried, Coinbase’s Brian Armstrong, and the Winkelvoss twins are difficult to ignore. Just a week ago 27-year-old Vitalik Buterin, the co-founder of Ethereum, another cryptocurrency, donated about $1 billion in cryptocurrency to help save lives of COVID victims in India. Cryptocurrency investors have done well in the past few years and the asset class deserves serious consideration. I am an engineer at heart and my approach is to make decisions based on the numbers. When I wrote The Personal Cash Flow Formula I examined all the major asset classes including cryptocurrency. The latest developments do merit a further deep dive. So I do that here.
Let’s start with the appeal of cryptocurrency. What are the pros? Why do people get excited about this currency alternative and investment? There are a number of very attractive features. The key ones are that cryptocurrency is
- Decentralized–unlike physical currency such as the US dollar, the Euro, the Yen, etc. all of which are controlled by their respective governments and regulated by central banks, cryptocurrency is not regulated by any one central institution.
- Anonymous–though all transactions are stored in the Blockchain people can transact without revealing their identity. This is different from traditional banking where the financial institutions have all sorts of data on their customers including spending patterns, physical address, credit history, etc.
- High Return–from an investment perspective the returns have been in the thousands of percentage points over the past 12 years. Mind you this is all the track record that exists and there have been ups and downs. It is hard to argue that more people, corporations and institutional investors are increasingly more interested in this asset class. There is a low barrier to entry as you can invest in fractional shares. The returns have certainly been impressive over the existing history. The trend to date has been choppy but clearly upwards.
The cons are as follows:
- New–the asset class is new and some will argue unproven. Cryptocurrency is about a dozen years old so in the grand scheme of things historical data is limited. Bitcoin specifically was founded after the financial collapse of 2008 by Satoshi Nakamoto as a means to circumvent the existing banking infrastructure. It is impossible to know that the current upwards trajectory of the past 12 years will continue.
- Question of Intrinsic Value–unlike other asset classes it is very difficult to put an actual value on cryptocurrency and to understand what that value stems from. Regular currencies are supported by their governments and corresponding economies. Investment classes such as stocks derive their value from company profits and the promise of company future growth. Real estate values are tied to the physical, tangible assets, people’s willingness to pay for these hard assets and the cash flows that they generate. The value of cryptocurrency depends on supply and demand. On the supply side this is determined by how much of that currency is allowed to exist in the system and how expensive it is to mine the cryptocurrency. Currency mining in turn is often tied to the price of electricity as it takes a good deal of power to run the computers to crunch math to create the coins. On the demand side there has been continued interest to date. The question is “What do bitcoins derive their value from?” There is not a neat and easy answer that many people understand.
- Investment or speculation? It is important to note that the space has been characterized by repeated and significant boom and bust cycles. Some have likened cryptocurrency to the Beanie Baby craze of the 1980s. Others have compared it to the Dutch Tulip bubble in the 17th Century. More recently we had the dot com bubble where anything on the internet was perceived by some to have astronomical value. Remember petfood.com? We all know how all of those ended. They were bubbles that bust leaving a lot of people significantly worse off. This brings me pause and the question for me becomes “Is this an investment or a speculation?” There is room for both. There is nothing wrong with growing your money ten-fold or a hundred-fold in a short amount of time. But you need to understand what you are doing, realize that it may not workout how you expect and understand the downside risk.
- Volatility–Bitcoin and other cryptocurrencies valuations have been extremely volatile. A year ago, in late May of 2020, the price of Bitcoin was just over $9,000. By October, 2020, five months later, the price was $10,500. It took off from there and rose in rapid fashion to peak at over $63,000 in mid April of 2021, just six months later. In the past month, however, the price has dropped from $63,000 to $38,000 on May 21. This is an intense and dramatic round trip. Certainly exciting but if you are betting your kids’ college tuition and being able to rest easy in retirement I would be scratching my head on this one.
I am no financial advisor. I am also not one to only preach real estate or nothing for everyone. I have done well in stocks. For reasons I outline in my writings, mostly volatility and tax treatment, I transitioned the majority of my assets to real estate. I have done extremely well in real estate and continue to be excited about this asset class. What I know is that investors need to understand the asset class they invest in, their appetite for risk and be comfortable with the vehicles that they choose. You don’t have to invest in only one asset class. Pick what suits you. And yes, give yourself options. If you have some funds that you can afford to lose, an amount that won’t change your life if it disappeared, you should speculate a little! Keep it interesting! Do it with eyes wide open! Buy some Bitcoin, Dogecoin or Husky coin!
Cryptocurrency or Real Estate
Ten years ago Bitcoin and other cryptocurrencies were worth thousands of percent less than they are today. The ROI for anyone who got in then is astounding. Real estate cannot compete with that. The volatility of Bitcoin and other cryptocurrencies is also greater than most asset classes. It is even greater than stocks. If as an investor you have some money to put into this asset class and ride the roller coaster highs and lows I cannot fault you for it. Real estate in some respects is the polar opposite investment to cryptocurrency. It does not move quickly, it is illiquid, there is relatively very little volatility, it is unexciting. Real estate investing is like watching paint dry.
Personally I don’t yet own any cryptocurrency. I like the stability of my real estate investments and their favorable tax treatment. I like being able to sleep at night not waiting to wake up and discover that a tweet from Elon Musk, or a skit on SNL or a regulatory decision by some government agency, somewhere in the world just tanked my investment. I like the predictability of hundreds of tenants paying rents and being able to monitor costs and making the right improvements to the properties in our portfolio. I like the passive income stream, the depreciation, the equity buildup as we pay the mortgage, the appreciation over time as the population grows, and the 70%+ leverage that this asset class provides. One more thing I like–real estate is simple. Everyone understands the value of a place to live. This value was underscored for all of us in the past year during the Coronavirus pandemic. Shelter is a basic need. In 2021 I am investing in multifamily real estate.
But notice I said I don’t yet own any cryptocurrency! 🙂 That cryptocurrency elevator is currently going down and I don’t have the crystal ball to know where the ground floor is. There is a chance that once the elevator starts going up again I might just throw some play cash in there and give myself an option to get off the elevator at a later time, hopefully at a higher floor.
At Cape Sierra Capital we focus on providing investors with a high risk adjusted return by investing in multifamily real estate. To get a more detailed analysis of the various asset classes available to retail investors and how I arrived at investing in multifamily real estate download The Personal Cash Flow Formula.