News about bitcoin evolving from a currency into an investment vehicle has taken the world by storm. The evolution started in early 2017 as investors became increasingly interested in this cryptocurrency. In just a few quarters, bitcoin – and all things cryptocurrency – became a full-blown global sensation when Chicago-based CBOE Global Capital Markets began offering investors the opportunity to bet on the future health of bitcoin in the same manner they can bet on stock market futures in early December.
But what exactly is bitcoin and why is it causing such a stir? Bitcoin is a digital currency or cryptocurrency created in 2009 by the elusive Satoshi Nakamoto (who many experts say is a fictional person). It’s used to buy goods and services online. Bitcoin was initially intended to be a universally accepted form of currency, untraceable by authorities and governments. As a result, it was often used to purchase black-market items, such as drugs, weapons and other illegal goods and services on the dark web.
In the past 12 months, though, the value of bitcoin has skyrocketed more than 2,000 percent, reaching a high of approximately $20,000. Is such astounding growth in the cryptocurrency market sustainable for investors, or would they have better luck buying a hard asset, such as real estate?
To help answer that question, HomeUnion® examined three reasons why investing in real estate is better than investing in bitcoin.
1) The bitcoin bubble could burst soon. Single-family rental (SFR) real estate, especially in non-coastal markets, is not showing any signs of a bubble.
Over the past year, the value of bitcoin has soared from about $775 to a high of nearly $20,000. While the currency has always been volatile, it had a ceiling of approximately $1,000 until the investment community expressed interest in trading bitcoin futures this year. In a recent Forbes report, Jeffrey Dorfman, an economics professor at the University of Georgia says that bitcoin’s volatility strips it of the characteristics needed “of a plausible substitute currency,” making it instead a “speculative asset, a get-rich quick scheme.” Stable values are required to encourage both commerce and investment, since people need to understand the value of what they’re buying, and buying into, Dorfman continues.
There’s no bubble in the housing or SFR market. Following the Great Recession, which was caused by a housing bubble in 2008, the Obama administration put regulations in place to protect consumers from predatory lending. Furthermore, banks and lenders stopped offering zero-interest and ultra-low interest mortgages. This cautious approach to lending has resulted in a decades-low level of delinquencies and foreclosures.
As an asset class, real estate has never appreciated anywhere near the level bitcoin has over a period of 12 months, even during the boom times of 2004 through 2006 and the post-recession era of prosperity from 2013 to 2015. Some of the hottest real estate markets, including as San Francisco, Oakland, New York City and other coastal markets, saw prices increase between 30 percent and 40 percent from 2013 to 2015. Nonetheless, these metro areas were anomalous: Overall from 2013 to 2015, owner-occupied home prices in the U.S. only increased 4.3 percent on average, while SFR prices increased only 3.6 percent on average annually, when adjusted for inflation.
Market location provides additional stability to real estate investors. Non-coastal markets are typically immune from the volatility of coastal markets, so prices in markets like Dallas, Atlanta, Chicago, Orlando and Charlotte grow more consistently. These markets are also among the most lucrative for rental real estate investors because of their low entry prices and strong rental demand.
“Real estate offers investors the ability to purchase a tangible, hard asset that will appreciate in value consistently over the mid-to long-term,” says Steve Hovland, director of research for HomeUnion®. “Generally speaking, SFR investments produce solid returns and offer a true diversification from the stock market.” Case and point: Average returns for SFRs from mid-2016 to mid-2017 were 18.3 percent, but the longer the holding period, the greater the compounded return.”
2) Bitcoin cryptocurrency, which fuels bitcoin-futures investing, remains unregulated by the Federal Deposit Insurance Corporation (FDIC). In contrast, government-backed currencies like the USD and mortgages, which fuel real estate investing, are insured by the FDIC.
Bitcoin isn’t guaranteed by any government, and it’s not subject to FDIC or Securities Investor Protection Corporation protections. Some exchange marketplaces, such as Coinbase, provide FDIC protections for bitcoin and other cryptocurrency transactions. With a Coinbase U.S. Dollar-based “Wallet,” consumers can conduct FDIC-insured transactions, but only up to $250,000.
IT Business Edge also reports that cryptocurrencies have encountered “serious security issues.” Bitcoin exchanges are among the most-attacked types of websites, with nearly 80 percent of all of related websites coming under attack. “As cryptocurrencies become more accepted, we have to assume these marketplaces and exchanges will be favored targets of hackers,” the report states.
HomeUnion® and other companies in the SFR industry strive to remain transparent.
For instance, HomeUnion® utilizes big data to analyze 110 million existing homes in 200,000 neighborhoods across the country, and processes that data in real time to give investors a clear picture of which properties in which neighborhoods – A, B or C – are best for their personalized investment goals.
Additional transparency in the form of detailed monthly performance reports on every rental property acquired by investors are delivered directly to their email inboxes. This information includes such monthly expenses as loan payment, property insurance, asset management fees and perhaps most important – cash flow, which is the income generated each month by the rental asset.
3) Investing in bitcoin is bad for the environment. Investing in existing real estate is good for the environment.
Bitcoin requires computer scientists to use high-powered machines to mine for the cryptocurrency, which consumes high levels of electricity. The precious commodities of coal and water are utilized in the bitcoin-mining process, the majority of which takes place in China.
According to a recent Bloomberg report, Bitmain Technologies Ltd. runs a server farm in Mongolia “with about 25,000 computers dedicated to solving the encrypted calculations that generate each bitcoin. The entire operation runs on electricity produced with coal.” It just so happens that China is already the biggest polluter in the world, and consumes more coal than any other nation.
Existing rental properties, on the contrary, typically benefit the environment and communities in which they’re located. Rehabbing an existing property up to HomeUnion® Home standards, for example, is a sustainable reuse method that conserves resources such as lumber and copper. Demolition and rebuilding properties consumes a fair amount of resources, including water and electricity. These commodities are also spared when the life span of a residential structure increases.
To find out more about remote real estate investing using US Dollars, financing, a self-directed IRA and not bitcoin, contact a HomeUnion® investing expert today.