Buying a house is often the largest financial expense in a person’s life. Sometimes, it is not just an investment consideration but also includes the need for personal residence. Overall, buying a house is one of the most mainstream investment methods today, or you could say that buying a house is like an exit strategy, as the goal of investing and making money is often to buy a property.
As a newly emerged asset in recent years, how does buying a house compare to buying cryptocurrencies in terms of investment?
This article will compare buying a house and buying cryptocurrencies from the perspectives of historical price fluctuations, tools and characteristics, and risks. It will analyze the characteristics and advantages and disadvantages of each. If you are curious about these two investment methods or are deciding which market to invest your funds in, this article is for you.
Buying a House vs Buying Cryptocurrencies: Which is more profitable? Five-year performance comparison
When comparing buying a house and buying cryptocurrencies, we are not focusing on specific regions or specific currencies. Instead, we are looking at the past five years.
The housing price data is based on the Residential Price Index from the Ministry of the Interior, covering the entire Taiwan region. Since the latest data is only available until 2023 Q4, we will look at the period from 2018 Q4 to 2023 Q4.
The cryptocurrency data is based on the total market capitalization of cryptocurrencies. Comparing market capitalization with price is not very accurate, but currently, there is no cryptocurrency index available. If we only compare the price of Bitcoin, it would be too specific. The overall market capitalization provides some reference, but it may have a slight magnifying effect. When reading the data, we need to take this into consideration. For reference, the maximum price increase of Bitcoin during the same period was +1775%, and the maximum price decrease was -76%. The cryptocurrency data mentioned above should be taken with a grain of salt.
Real Estate Investment | Relatively Stable and Leverageable
Although it seems that buying a house has much lower maximum price increases compared to buying cryptocurrencies when we only look at the maximum price increase, the volatility of housing prices is much smaller than that of cryptocurrencies. In the past five years, the maximum market capitalization decrease of cryptocurrencies exceeded 60%, and the price of Bitcoin dropped more than 70%. On the other hand, the Ministry of the Interior’s housing price index, covering the entire Taiwan region, has not experienced any decreases in any quarter and has shown an upward trend in the six major municipalities with very few decreases and small magnitudes.
In terms of stability, buying a house is better than buying cryptocurrencies.
When buying a house, people usually prepare a down payment and obtain a mortgage. The loan amount depends on factors such as the location of the property, the condition of the house, and the creditworthiness of the applicant. In general, the down payment is between 20% and 30%. This means that buying a house usually involves a financial operation with a leverage of 3.3 to 5 times. A mortgage is the cheapest form of leverage among all funds. It has the lowest interest rate, which means it is the lowest-cost leverage tool.
As mentioned earlier, if we evaluate the investment performance based on the housing price increase, we need to multiply it by 3.3 to 5 because usually, the entire purchase amount is not self-financed, but financed through a mortgage, which means leveraging.
A mortgage is the cheapest form of leverage, and some people use it for investment. For example, they only pay the interest on the mortgage and use the remaining funds for investment, or they use a refinancing loan to invest the increased value of the property.
In terms of leverage cost, buying a house is better than buying cryptocurrencies.
The so-called leverage cost refers to the cost of funds. Since leverage means borrowing money to invest, there is an interest payment associated with borrowing money. The main cost of leverage is the cost of funds, which is the interest rate on the borrowed money. Currently, the mortgage interest rate is around 2-2.5%, the general credit interest rate is 3-15%, and the stock brokerage margin loan interest rate is 6-7%.
Cryptocurrency Investment | Lower Threshold, Higher Potential Returns, Better Liquidity
Usually, when buying a house, it is done on a per-unit basis. The price of a single house can range from hundreds of thousands to tens of millions. Unless it is a joint venture under special circumstances, buying a house usually involves a purchase amount of hundreds of thousands to tens of millions. Considering a down payment of 20%, it still requires a preparation of several million dollars.
On the other hand, buying cryptocurrencies is different. Although the current price of one Bitcoin is around two million Taiwanese dollars, the basic trading unit of cryptocurrencies is not one Bitcoin. The smallest unit of Bitcoin is one satoshi, which is one hundred millionth of a Bitcoin. Most cryptocurrencies, like Bitcoin, can be divided into one hundred millionth or even smaller units.
While it may be difficult to afford one Bitcoin priced at two million Taiwanese dollars, one satoshi Bitcoin is only 0.02 Taiwanese cents. However, most exchanges have a minimum transaction limit, and it is not possible to buy just one satoshi at a time. The minimum transaction amount is usually around 5-10 US dollars, which is equivalent to about 150-300 Taiwanese dollars. While we need several million dollars to buy a house, we can start buying cryptocurrencies with just a few hundred dollars.
In terms of financial threshold, buying cryptocurrencies is better than buying a house.
As a newly emerged asset, cryptocurrencies have shown extremely high price surges. Bitcoin is the most well-known cryptocurrency, and many people who have not yet entered the cryptocurrency market may think that Bitcoin’s volatility is too high. However, compared to other cryptocurrencies, Bitcoin is considered relatively stable.
The chart above shows the price trends of the top five cryptocurrencies from December 31, 2018, to December 31, 2023. It can be seen that Bitcoin is relatively stable compared to the others. These are not unknown high-risk small coins, but the top five cryptocurrencies in terms of market capitalization (excluding stablecoins) with price increases ranging from hundreds to thousands of percentage points and the maximum increase exceeding 10,000%.
In terms of potential returns and price surges, buying cryptocurrencies is better than buying a house.
However, from the chart, we can also see that during the same period, housing prices in Taiwan continued to rise steadily with very few decreases and small magnitudes, while cryptocurrencies were in a different world. Although they have astonishing surges, they also have astonishing volatility, with ups and downs and not insignificant price drops.
As mentioned earlier, buying a house is relatively more stable compared to buying cryptocurrencies, while buying cryptocurrencies has higher volatility compared to buying a house.
Liquidity is a financial term that evaluates the ability to convert assets into cash without affecting the price. How quickly and without affecting the price can assets be sold and converted into cash? If assets can be sold and converted quickly without affecting the price, then we say they have good liquidity.
When buying and selling houses, because buying a house is often the largest financial expense in a person’s life, people usually do not act impulsively and need to go through many processes and evaluations.
The process of a housing transaction usually involves the following steps:
1. Listing the property for sale.
2. Potential buyers inspecting the property.
3. Buyers making offers and negotiating prices.
4. Waiting for the bank to evaluate the loan-to-value ratio.
5. Signing the contract, applying for a mortgage, and completing the handover process.
The entire process takes at least a few weeks to a few months. If you do not want to sell at a lower price, it may take even longer. If you want to cash out faster, you may have to lower the price to some extent.
Although people often say that real estate holds its value, real estate is not considered a highly liquid asset. When there is a need to convert it into cash, it takes time or requires a price reduction to expedite the process.
Cryptocurrency markets trade 365 days a year, 24 hours a day, and the trading is extremely active. Unless it is a very large transaction involving tens or hundreds of millions, for transactions within the mainstream exchanges, you can sell within seconds to minutes with little discount.
After selling, you receive the cryptocurrency, which can then be exchanged for Taiwanese dollars and transferred to your Taiwanese bank account. Unless there are abnormal issues with the account or it involves a large amount in a short period, the withdrawal process through Taiwanese channels usually takes 1-3 days. If you choose to sell on overseas exchanges and receive the proceeds in US dollars through wire transfer to a foreign currency account, the foreign currency transfer may take a little longer, about 3-5 days.
In terms of liquidity, buying cryptocurrencies is better than buying a house.
Buying a House vs Buying Cryptocurrencies | Comparison of Inflation Resistance
Inflation =Currency inflation typically refers to the increase in prices, which reduces the purchasing power of money. The concept of inflation resistance refers to investing money in assets that have a higher rate of return than the rate of inflation, thus preserving purchasing power.
In other words, if most of your assets are solely held in a bank, they will depreciate in the long run due to the trend of rising prices.
The chart below shows the consumer price trend in Taiwan during the period from 2018 Q4 to 2023 Q4. Over the course of five years, prices increased by a total of 9.55%. Some people claim that investing in real estate or buying cryptocurrency is a way to resist inflation. Looking at the performance of buying real estate and buying cryptocurrency over the past five years, it is clear that their growth rates have far exceeded the rate of inflation, demonstrating their inflation resistance.
However, take a look at this image that has been circulating on the internet:
Of course, this image does not depict Taiwan specifically, but the situation in Taiwan is similar. Based on this image alone, we can draw a simple conclusion:
Compared to rising prices, housing prices will also rise, indicating that real estate does indeed provide a hedge against fiat currency inflation.
Furthermore, compared to rising housing prices, the price of Bitcoin has increased even more, offering protection not only against fiat currency inflation but also against housing price inflation.
Comparison of Risks in Buying Real Estate vs Buying Cryptocurrency
This comparison mainly focuses on the risks related to investing and can be categorized into several types:
1. Risk of losing assets:
– In the case of real estate, this could include being scammed and having the property transferred to a fraud group, or natural disasters and accidents causing property damage.
– With cryptocurrencies, the risk includes falling victim to phishing or scams, or experiencing cybersecurity issues that result in the leakage of wallet private keys.
– In order for a property to be transferred to a fraud group, it would require a series of steps, while cryptocurrencies can be lost in just one or two steps. The probability of losing property due to natural disasters or accidents is much lower than the risk of personal cybersecurity. Therefore, in terms of the risk of losing assets, buying cryptocurrency carries a higher risk.
2. Risk of price decline:
– As we have seen from historical trends, the price of cryptocurrencies fluctuates much more than housing prices. Cryptocurrencies not only experience more frequent and larger declines but also carry a higher risk of price decline.
3. Liquidity risk:
– Cryptocurrencies have better liquidity compared to real estate. It is much faster to liquidate cryptocurrencies and obtain cash, while selling a property can take weeks to months. Therefore, in terms of liquidity risk, buying cryptocurrency is more advantageous.
4. Risk of leverage extension:
– Leverage involves borrowing money. In the case of real estate, if one day you are unable to repay the mortgage, the property will be auctioned by the bank. But what if the proceeds from the auction are not enough to repay the debt? The bank will extend the search and seizure to other assets. In other words, the risk will spread. Although real estate mortgages are secured by the property, if the collateral is insufficient, the risk will spread to other assets.
– Cryptocurrencies, on the other hand, are different. Apart from borrowing money to buy cryptocurrencies in the real world, leveraging mechanisms within the cryptocurrency ecosystem also require collateral. If there are issues, the collateral will be liquidated, and once the liquidation is complete, the risk ends. At most, you will lose the collateral, but the risk will not spill over and affect other assets. In terms of the risk of leverage extension to other assets, buying real estate carries a higher risk.
Comparison of Passive Investment and Returns in Buying Real Estate vs Buying Cryptocurrency
Passive investment has become popular in recent years, as active investment is often influenced by individual subjective factors and may not be as stable as passive investment.
However, it is difficult to passively invest in real estate. Firstly, there is no real estate index that can be invested in. Secondly, it is difficult to construct a real estate investment portfolio. A single property can cost millions or even billions of dollars. How much capital is needed to play in the real estate investment field? Most people can only afford to buy 1-3 properties, which is far from enough to achieve diversified risk management. Therefore, buying real estate is essentially an active investment.
Although there is no cryptocurrency market index yet, there are tools available that provide similar functions, or you can create your own investment portfolio by including the top cryptocurrencies and major altcoins. This allows you to create a passive investment portfolio that closely resembles the market index.
In terms of the feasibility of passive investment, buying cryptocurrency is superior to buying real estate.
Some people are not only seeking passive investment but also passive income. Buying real estate and buying cryptocurrency are both investment methods that can generate passive income. With real estate, you can earn rental income by renting out the property, while with cryptocurrencies, you can earn income through mechanisms such as staking.
In this regard, both methods have their advantages and disadvantages. Generating passive income from real estate requires management, such as finding and managing tenants, maintaining the property, etc. It comes with a certain cost, but the advantage is that once the property is rented out, you will receive a stable monthly passive income.
The simplest form of passive income from cryptocurrencies is through staking. Usually, it only requires interacting with the contract once or twice to complete the process, without the need for additional management. There are no management costs involved. However, the income from staking is also in the form of cryptocurrencies, which are subject to price fluctuations. Therefore, passive income from staking is not as stable.
Comparison of Pros and Cons of Buying Real Estate vs Buying Cryptocurrency
Buying Real Estate:
– Past five-year return: 35.52%
– Stability and hedging: Relatively stable and better
– Volatility and downside risk: Less frequent and lower magnitude of declines
– Leverage costs: Better, with lower mortgage rates
– Leverage multiples: Usually 3.3-5 times, special cases can be higher, but unlikely to exceed 20 times
– Risk of leverage extension to other assets: Worse, risks can spread
– Liquidity: Worse, it takes weeks to months to sell and liquidate the property
– Investment threshold: Higher, at least several million dollars
– Convenience of trading: Worse, need to wait for sellers, intermediaries, banks, and transfer processes
– Transaction costs: Higher, including costs and taxes for buying and selling a property, which can account for a percentage of the transaction amount
– Asset security: Better, excluding natural disasters and accidents
– Feasibility of passive investment: Almost unfeasible unless you are a major investor
– Stability of passive income: Better, but higher management costs
– Sense of stability: Better, as real estate is tangible
Buying Cryptocurrency:
– Past five-year return: Nearly 1800%
– Stability and hedging: Poor, with significant volatility
– Volatility and downside risk: More frequent and more severe declines
– Leverage costs: Worse
– Leverage multiples: Can go up to 125 times
– Risk of leverage extension to other assets: Better, as risks end with liquidation
– Liquidity: Better, can sell within seconds and exchange for fiat currency within days
– Investment threshold: Lower, can start with a few hundred dollars
– Convenience of trading: Better, can open an account within minutes and trade with a mobile phone, with the market open 24/7
– Transaction costs: Lower, with exchange fees usually below 0.1%
– Asset security: Poor, with higher risks of cybersecurity and fraud
– Feasibility of passive investment: Feasible even for small investors, using Dollar-Cost Averaging (DCA) tools for continuous passive investment
– Stability of passive income: Almost none, as income is subject to price fluctuations
– Sense of stability: Poor, as cryptocurrencies are virtual assets that cannot be seen or touched
– Learning resources: Mature market with many free and paid resources available
Summary: Buying Real Estate vs Buying Cryptocurrency – Not Just a Financial Decision
This article provides a comparison between buying real estate and buying cryptocurrency. However, this is not just a financial decision; it is also a life choice. Buying real estate involves considerations beyond investment, such as personal use and credit history when dealing with banks. The assets you invest in to some extent also influence how others perceive and understand you. When people know that you invest in real estate or cryptocurrency, their perception of you may change.
It also involves choosing a lifestyle and pace. Dealing with the high volatility of cryptocurrencies and keeping it separate from your daily life requires more mental fortitude and discipline. However, if you enjoy this fast-paced environment, it may be the right choice for you.
Furthermore, it involves evaluating future prospects and risks. As a physical asset, real estate is exposed to risks that virtual assets do not have, such as natural disasters and wars. In the face of these special risks, cryptocurrencies offer a more portable and flexible asset choice.
In practice, buying real estate and buying cryptocurrency are not mutually exclusive and can be done simultaneously. By diversifying your asset allocation, you can enjoy the advantages of both and avoid the disadvantages.
So, when it comes to buying real estate or buying cryptocurrency, there is no need to make a choice – we can have both.