At first glance, real estate and Bitcoin might not appear to have very much in common. But upon closer inspection, some peculiar parallels begin to emerge between the two asset classes.
Here’s an interesting list of some of the most obvious of the similarities between the world's oldest and the world's newest investment asset classes:
- Real estate developments and Bitcoin are both brilliant investments if you are investing from the standpoint of buying the underlying asset, but the value is less obvious when its fractional: It’s become increasingly common for property developers these days to buy disused or abandoned buildings and sites on a freehold basis, do them up, and sell on the individual condominiums or houses in the form of leaseholds of variable timespans (ranging from 50 to 999 years, with 100 years as a rough average). At the same time, people are living longer. A leasehold is not a freehold; the closer that you get to the end of the lease, the more aggressively the value declines. In the same way, Bitcoin promises the potential of the Blockchain that underlies the technology. For sure, if you owned the Blockchain that Bitcoin runs off, you’d have tremendous value indeed in your portfolio – much like the development freeholder. But as the owner of a Bitcoin, what you have is merely a fractional representation of that technology. That is not the same thing at all.
- Both Bitcoin and real estate are in far more supply than demand these days, but they are amazingly stable in price: In almost every city you visit, be it London, Paris, New York, Detroit, San Francisco or wherever else, you’ll quickly find a place to live these days – mostly thanks to the proliferation of apps such as Air Bnb, which makes rooming with someone an overnight task. (Most recently in Cuba, the app was an overnight success.) A friend of mine who recently moved to New York found a place to live in under a week – a feat that was once all but unheard of. Yet prices aren't plummeting. Why? For the same reason that Bitcoin’s prices have held above $400 for the past half-year. There are an influx of foreigners – in particular Asian foreigners –snapping up the new developments as investments.
- Bitcoin and property markets promise plenty of usage at the secondary-market level, but in reality, get most of their price action at the primary market level: Real estate developers love to hark on about what great investments properties make for over the long-term, but something is only as great an investment as the investor’s ability to cash out of it. The truth is that finding someone to repurchase your newly-built condo development these days is much trickier than it was a decade ago, when there wasn’t as much new product coming to market (in Australia this is most notable, although it's a similar situation in North America and Britain too). The same is true for Bitcoin – while it’s easy to purchase any number of millions of dollars of the virtual currency, it’s much more difficult to find buyers for such large quantities. The lacklustre success of the Winklevoss twins' Gemini platform - billed as "the Nasdaq of Bitcoin" - proved this late last year. The simple explanation for this is that any major purchaser goes direct to a Bitcoin “miner” (sort of like the digital equivalent of a real estate developer) and negotiates steep discounts for their volume purchase action.
- Bitcoin and its associated assets – virtual currency units – and real estate are benefitting from massive capital influx as a result of a cottage industry of venture capital investments: Off-plan property development has become an increasingly popular trend since the sub-prime crisis, with individual investors funding the bulk of such developments. Actually, buying property “off plan” (meaning: before it’s been built) is much the same as making any early-stage venture capital technology investment: it carries massive risks. Essentially, the likelihood of making a killing comes down to the quality of the management team behind the project, the potential marketability of it after development and the overall likelihood of it getting to completion stage. Similarly, many Bitcoin start-ups and other virtual currencies got going from a very similar trend – crowdfunding or its slightly less investment-oriented nemesis, crowdsourcing. Ethereum, a rival Blockchain to Bitcoin’s, was the most famous of these, raising $12.7 million back in 2014. Nowhere near as many property developments or Bitcoin start-ups would be around today were it not for the individual investor funding their earliest stages.
- Financial institutions have no real interest in lending to the majority of real estate developers or in putting capital into early-stage virtual currency start-ups (let alone into assets like Bitcoin) but they all track the progress of the industry closely for fear of being affected: For banks, 2007-2009 was a stark reminder that the only way that things can go for an organization that manages vast wads of cash is worse than they are going today. Since that point, banks have had financial analysts tracking new home sales and even other related indicators such as new furniture retail sales like hawks. However, that’s not because they are spying new customers – in fact, banks are lending less today than they were before to new and risky real estate developers. It’s so they can prepare themselves for another recurrence of the subprime crisis. In the same way, banks are all to some degree "modestly" participating in the various Blockchain membership clubs that venture capital organisations are setting up, often hiring a tech developer or two for a short-term role to educate them about the technology. Some of these institutions occasionally whisper about making their own Blockchains, too. But none of these activities are because they see a potential profit to made from doing so – at least not one that’s very mouth-watering. Rather, they want to protect themselves from technological disintermediation, which can happen in a heartbeat, sort of like a mortgage crisis.
Making Sense of This Convergence
Is it significant that the oldest asset class in history – the home we live in – has so much thematically in common right now with a brand new, completely unknown and still very poorly-understood asset that amounts to a virtual unit of a ledger software protocol?
I think it is. For one, it shows up the increasing reliance of world growth on the individual investor, and significantly, the individual overseas investor. Families in countries such as China, Taiwan, Singapore and elsewhere in Asia make up an increasingly important segment of the world growth spectrum, and the parallels reveal this to be the case.
Secondly, it’s clear that disruption is taking aim at its most primeval target: new market penetration. In the world's most populous areas, which up until only recently were linked to everyone else in a passive sense (which is to say, by nothing more sophisticated than a neighbour's technicolour big box screen), active virtual communities of mobile users have stretched the global investment playing field overnight in a way that has exerted considerably more influence on our portfolios than we are probably even aware of. This embeds the whole financial system with a massive potential for future returns on a much shorter timeline. In other words, the influx of emerging market investors mostly via the internet to the world's various asset classes creates a sharp rise in what financial economists call Beta; the risk of giant swings in price movements.
Last, when considering that mortgages were, until relatively recently, not even priced according to any reasonable likelihood of long-term home ownership enduring, and that assets such as Bitcoin have commanded similar values to an ounce of gold, it’s evident that pure human speculation plays a much greater role in our investment decisions than most of us realise. In fact, these events are absolute proof that Beta can withstand much more prevailing wisdom than ever before.
These are dynamic and important observations. At heart, they suggest that despite the explosion in Big Data analytics, stats and significant evaluative criteria that has occurred in the past decade, in many ways the investment market environment is at no more a state of equilibrium at any point today than it was a century ago.
What does that forecast? The answer is: a very turbulent, and somewhat cut-throat, game of winners and losers in the new virtual, disruption-biased global economy. Thus, an uncomfortable paradox emerges: for even as it raises living standards for most of us across the board, wealth and income-equality are two things that technology will not be bringing along with it into our future.
