In the past decade or so, cryptocurrency has steadily emerged as a new asset class that many people have become interested in. Bitcoin is the most well-known cryptocurrency in this asset class and considering the fact that it started out being worth around a penny and is now worth over $60,000, a lot of investors have been drawn to this space.
Cryptocurrency has also started to overlap with many other industries such as traditional finance, art, and more. Through blockchain technology, there are now decentralized financial products that compete with traditional financial products and cryptocurrency-based art products that compete with traditional art products.
Currently, about 21 million Americans, or about 14 percent of U.S. adults own Bitcoin, and this number is growing steadily. With so much fervor occurring around cryptocurrencies, many people have started to wonder whether or not cryptocurrency has a future in real estate investing. In this article, we will break down this issue.
The short answer: no… or at least not yet
Traditional real estate investing is sort of the antithesis of cryptocurrency investing. Most people who get into it do so because they are looking for stable and predictable returns that are essentially guaranteed to occur every single year. Real estate investing involves taking up ownership in assets that are as physical as physical gets: buildings.
Real estate investing is incredibly secure, generally speaking, because we know that people will always need housing. Therefore, there is guaranteed, built-in demand for the industry at large. Cryptocurrency is a horse of a different color. Here is a list of some of the most significant shortcomings of and problems associated with cryptocurrencies:
1. They are NOT REAL.
Cryptocurrencies are non-physical assets. They exist only as code on computer screens. They cannot be touched, they cannot be held. No one even knows who the original creator of Bitcoin was, which makes them feel even less real. Bitcoin was created by an anonymous entity going by the name Satoshi Nakamoto.
There is very little difference between cryptocurrencies and other virtual currencies that are worthless such as currencies inside of video games. Because cryptocurrencies are not real and only exist in cyberspace, they can never provide the same sense of security and tangibility that physical real estate provides. It also makes them infinitely more vulnerable to theft from sophisticated hackers who only need to get you to click on a link in order to rob you in many circumstances.
Buildings on the other hand, are impossible to be stolen. Because cryptocurrencies are not real and are only software programs, it makes it very difficult for investors to feel comfortable investing large sums of money in them. After all, what if something goes wrong with the software?
2. They are incredibly volatile.
This is one of the biggest problems with cryptocurrency. Even Bitcoin, the most valuable, the oldest, and arguably the most trusted cryptocurrency regularly experiences drawdowns of 50-85%. These drops can be gut-wrenching. Many people have lost substantial amounts of money in these drawdowns.
It’s true that oftentimes, the swings go in the other direction, making incredible gains for investors. But, the fact that cryptocurrencies are so volatile means that they are definitely not the place to put your money if you are looking to grow your wealth steadily over time. At best, cryptocurrencies are a speculative asset that are a good option for people who are looking to gamble.
But, if you fall into this category, you might as well just go to your local casino and put your money on black at the roulette table. The volatility at the casino will be comparable to that which you will most likely experience with cryptocurrencies.
Real estate investors tend to shy away from volatility and instead prefer low-risk investments. This is one of the biggest reasons why cryptocurrencies are yet to merge well with real estate investing.
3. Murky legal standing/regulatory concerns.
Because the cryptocurrency industry is so new, there is a lot of concern for investors around legal standings and regulations. The past ten years have shown that many countries are willing to just outright ban cryptocurrencies or ban aspects of the cryptocurrency industry such as mining. For example, China, which was once the world’s leader in Bitcoin mining just decided to suddenly ban Bitcoin mining in the spring of 2021. The price of Bitcoin dropped roughly fifty percent in the following weeks.
Many cryptocurrency investors live in constant fear that the government of the country that they are located in will suddenly do an about-face and ban cryptocurrencies entirely or will make major regulatory changes that could impact the price significantly.
It is true that some governments, such as that of El Salvador have shown incredible support for cryptocurrencies. But cryptocurrency policies are as seemingly random and diverse as the thousands of cryptocurrencies in existence themselves. For people who are looking to invest millions of dollars, or other large sums, the regulatory uncertainty that exists in the global cryptocurrency market is a major problem and it represents a very high risk. It is for this reason that most institutions and large corporations have not invested large amounts of their capital into cryptocurrencies. However, some, such as Tesla, Square, and MicroStrategy have started allocating significant amounts of capital into Bitcoin as an inflation hedge.
4. High technical barrier to entry.
Cryptocurrency is not something that is easy to understand. It requires significant study, adaption, and a complete perspective change in order to feel comfortable enough to use it for investing purposes. Many people have difficulty understanding how it works, what it is, where to buy it, how to store it, how to protect it from hackers, etc. Getting answers for all of these problems and acquiring all of the necessary knowledge that it takes to use cryptocurrencies takes time. This is especially true for people considering allocating significant capital.
Learning about cryptocurrency can be extremely difficult, especially for people who have spent decades in the real estate investing world. Cryptocurrency investing could not be more different from physical real estate investing.
Is there any opportunity in cryptocurrency for real estate investing?
Despite the abundance of challenges that exist currently in the cryptocurrency world, it is possible that in the future, there could be better opportunities for real estate investors in the cryptocurrency world. This is because blockchain technology allows for exciting possibilities such as fractional ownership, self-executing smart contracts, easy international purchases, etc.
Also, some investors consider assets like Bitcoin to actually be “real estate” – just in a digital form. In fact, some people have compared owning a Bitcoin to owning a block of the city of Manhattan in cyberspace.
So, yes, it is likely that cryptocurrencies will continue to intersect with real estate, perhaps in ways that no one has even considered yet in the coming years. But, for right now, due to the high volatility, regulatory concerns, and other issues with cryptocurrencies mentioned above, real estate investors should approach cryptocurrencies with extreme caution.
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About the Author
Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the host of REady2Scale , a podcast that highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.