Real Estate has been a favourite investment type for most of recorded history. And even though cryptocurrencies have only been around for a decade or so, they have risen in popularity so fast. They are being seen as an asset class. However, some people are fans of real estate and some are fans of crypto. But which one is better as a long-term investment? We conducted a review of both asset classes. Here at Investments Working Group to figure out just how effective these two are. Especially at holding their value over the long term. Let’s take a look.
Cryptocurrency And Bitcoin
The newest form of investment is a digital investment that involves the trade of digital currency, also known as cryptocurrency. The most popular and high in demand crypto is Bitcoin. This digital currency is backed by blockchain technology which makes it impossible to alter or change the transactions.
Cryptocurrency or Bitcoin does not inflate and is global. This means it can be exchanged anywhere in the world without any exchange rate. Just like any other currency, Bitcoin can be used to sell and purchase goods. How are bitcoins created? Bitcoin is created through ‘mining’ which involves solving complex math problems. These are then stored in a crypto wallet which can be stored in a user’s smartphone or any digital cloud.
For a high return, you always have to take high risks. Similarly, Bitcoin trading associates high risk. It may give a very high profit but there is a chance of losing your entire savings. Secondly, since it’s a digital currency, it can be a victim of cyberattacks. Then, there is a lot of room for errors while making the exchange. It is an intangible asset that can give you a return in very little time as compared to investing in real estate. But there is a high risk associated with cryptocurrency. Also, it is not managed by any government authority.
Factors that affect crypto prices
Unlike investing in other currencies or cryptocurrency is not affected by economic conditions. Nor by demographics, inflation rate or government legislation because they are not issued by the banks or government. Cryptocurrency is all about virtual money that is generated by mining (making and breaking of codes). Bitcoins are completely digital phenomena with a set of protocols and processes. Bitcoins have a price as it is efficient transferring money over the internet. There isn’t any involvement of a central bank. So let’s take a look at how the price of a Bitcoin can change.
The following are some of the factors that affect its price;
Supply And Demand In The Market
Let’s start with a simple Economics formula of supply and demand and its role in affecting the price of a Bitcoin. It depends on the availability of the coin. If it’s easily available in the market, the demand will increase and ultimately the price will go up. But, if the supply is more than the demand in the market, the price will drop and will be the best time to buy Bitcoins.
The supply of Bitcoins is affected by two things. First of all, the protocols of Bitcoin allows the generation of a new one at a fixed rate which is then introduced in the market. Since there is a limit to creating Bitcoins, the rate of generating new ones decreases over the years. Bitcoins are introduced in the market when blockchain transactions are processed and because the rate decreases with time, the demand increases at a higher rate as compared to supply leading to an increased price of a Bitcoin. This slowing down of Bitcoin circulation develops artificial inflation for this ecosystem as the block rewards are provided to the miners.
Another important supply effect depends upon the number of bitcoins allowed to exist in the system. Eventually, when the number will reach 21 million, the mining will no longer generate new coins and now the prices of the cryptocurrencies will depend upon other factors such as the popularity of the currency, legality and its demand.
Cost of Mining
Another important factor that affects the price of cryptocurrency or Bitcoin is the mining process which has its cost. It depends on how hard it is to mine a coin. The process includes validating the transactions and adding them to the blockchain. Currently, there are a lot of mining pools assigned to create the remaining coins. This is why it gets extremely difficult to buy a coin for yourself resulting in increasing the price of a Bitcoin. To generate these coins, a lot of electricity is required in the mining process. In countries where the rate of electricity is high, generating bitcoins might not be profitable.
Legal Issues & Is It Legal In The UK?
Different countries have different points of view when it comes to Cryptocurrencies. In some, it is considered as a legal tender while others have completely banned this investment. This shows that the number of transactions to make Bitcoins depends on how the country’s regulations take it. If a government tries to regulate it strictly, it affects the price of a coin while if they regulate it in a better way, they might encourage users resulting in a good price.
As far as the UK is concerned, they haven’t banned cryptocurrencies and the process of mining is involved. However, they haven’t considered it as a legal tender as no money is involved in the process. In 202, they considered Crypto as an asset but there are no laws and regulations made specifically for Crypto.
News & Media
The news and reports also influence the price of cryptocurrencies. Positive and negative comments delivered to the media have a strong influence on the price of a certain coin. For instance, if there is a report on a hack of any cryptocurrency either shared on the news or social media, the prices will go down because of the decrease in demand. Even a smaller comment can do so like Elon Musk shared something negative about the investment in Cryptocurrency in a night show and that led to a huge drop in the prices.
All of the above factors state that Bitcoins and other Cryptocurrencies are extremely volatile as their prices go up and down very frequently. However, it does not mean that it’s a bad investment. It is risky no doubt but there are chances of getting an amazing return. Apart from that some of the investors do it for the thrill. But, do your research, consult your financial advisors as there is a chance of losing all your savings in one go.
Real Estate Investment
When you buy any property with the intent of selling it or renting it out to make money out of it is called Real Estate investment. It is a tangible asset where money is invested for a long-term return. You can take out your money whenever you want or invest again or put in extra money to make a good price. It is easy and to some extent predictable in a way that living is a necessity and everyone needs to buy land at some point in life.
Real Estate Investment can be done in many ways; you can switch home and sell out the previous one, you can make it a business centre or a vacation resort or even put it up on Airbnb. So, it’s a multifaceted investment which means there is diversity in how you can invest in property. Another good point for investing in real estate is that you get tax breaks. However, in the UK, the Stamp Duty threshold has been increased due to Covid’19 so that the market keeps moving even in the pandemic situation. This duty will get back to normal on 1st October 2021. Stamp Duty Land Tax is the tax you have to pay on a purchase of land over a specific price and it is applicable in England and Northern Ireland. It is different for Wales and Scotland.
Risks in Real Estate Investment
Few aspects need to be considered before investing in a property. It takes time to sell your land or a building. You might end up spending too much on the property and don’t get any profit from it. So, it’s not a very fluid asset. And, there is high maintenance involved to keep the property in good shape, which is again costly. Secondly, there is a great deal of effort involved from the owner’s side as they have to keep up with the utility bills, etc., and collecting rent every month is a whole task itself.
Factors that affect property prices in the UK
Owning a property is generally the major portion of someone’s personal asset and wealth. Especially in the UK, despite its small footprint geographically, it is the third-largest real estate market after the US and Japan. People here tend to invest in property and there is a transparent process available that makes them comfortable in doing so. However, still, few challenges affect buying power. Some of these factors are;
Interest Rate affects the cost of paying mortgage
The interest rate has a significant effect on the UK and most other countries’ real estate markets. It affects the cost of paying the mortgage and if you are looking for a home with a mortgage then it is better to do your research. As the interest rate drops, the buying power rises and so more people will be able to buy a property, the demand goes up and so do the prices. Similarly, if the interest rate increases, fewer people would be able to invest in a property leading to a decrease in the demand and eventually the prices also decrease,
For the past few years in the UK, the rise in the interest rate has dropped the demand for real estate. This is because paying mortgage payments is the major chunk of expenses for any homeowner and even the slightest rise in interest rate can have a great influence. If anyone is unable to invest in a property as a whole, other ways of putting in money as well are easy to get in and out. For instance, Real Estate Investment Trust (REIT) are the funds that solely invest in property.
Here, more than one person can put in their share in owning one property and whatever is generated from that property is shared amongst the partners. It depends on the income generated from the rentals or how well the investments are doing. Its relationship with interest rate is indirectly proportional. When the interest rate goes up, the worth of the bond increases and becomes desirable and vice versa.
Economy Growth And Real Income
The economy shows the overall health of any state and the lifestyle of the citizen depends on it. If the economy of a country is good, its people will be having jobs and they will be able to buy property. If the economy is down, there will be unemployment hence less real estate investment.
In the UK, it was believed that owning a property is almost 3 times more than the salary, therefore, an increase in your income will also increase the prices of properties. However, the demand will increase. While on the other hand, an economic recession will lower the buying power leading to a drop in demand as well. There is a variation in how the economy affects the different real estates such as investment in a hotel will have a different trend as compared to investment in an office property.
Demographic Factors
Demographic factors such as age, gender, population, divorce rate, personal income, migration rate etc do affect the real estate market, the buying trends and are often overlooked. If we talk about the UK in particular, there has been a rise recorded in households. This means that the households are increasing more than the population. We can say that the family size is less and more family members tend to move out and live alone. This could be for education, jobs or just for privacy. Also, this is happening to start at the age of 16 or 17 which is early as compared to some years ago.
Moving out and living alone has increased households and the migration rate from Europe and from around the world. The divorce rate has increased which forces the two individuals or more to start living separately so ultimately the real estate market gets bigger and better because of all these reasons. These kinds of shifting trends in lifestyle can influence the real estate market and leave an impact for decades.
Government Policies and The Legal Aspects
The Real Estate Market in any country is affected by Governmental laws and policies. Every government has its set policies, subsidies and set taxes which eventually helps the buyer to decide whether he wants to invest or not because all of these factors will help him decide if it’s profitable or not. Easing out these policies can help in boosting the market. For instance, give a tax incentive by reducing it for the ones who are buying any property for the first time to give them a jump-start, improving the market as well.
A similar strategy was implemented by the UK government in 2018. They abolished stamp duty for the first-time buyers on properties up to 300,000 pounds to save them almost 5000 pounds. All of this was done to improve the market, although it increased overall prices up to 0.3%.
Comparison Of Crypto And Real Estate Investment
Before deciding which investment could be a better decision, let’s take a look at the pros and cons of Crypto as well as Real Estate investment;
Why Invest In Cryptocurrency?
Here are some of the reasons due to which investors are considering putting their money in Bitcoins and other Crypto in 2021. Bitcoins are;
- Not controlled by Government or Banks
- Not affected by the inflation or economic conditions of a country
- Easy to maintain as there are no maintenance cost involved in keeping Bitcoins
- Easy to trade
- Subdivided into smaller units which is why you can start buying from as low as $100
- Increasing its worth due increase in interest and more people are entering this market
- Reliable and secure form of investment
Factors You Need To Consider
Before jumping into virtual money investment, consider all the factors that might end up with a big loss. So, Bitcoins can;
- Act like a bubble. It inflates as the prices go high to a peak from where it can come down drastically so there is no trend that could be made based on the fundamentals
- Be extremely volatile as there are a lot of ups and downs in the market. Even very minor things can influence the crypto market
- Be illegal in some countries
- Be insecure because of no crypto laws available to tell what is right and what is wrong. Also, the system can be hacked as it is a solely digital procedure.
- Be illegal as there is very little or no government involvement present in this type of investment. Also, digital currency can be used in money laundering, frauds and black market. It is also a competition against the government currency.
Why Invest In Real Estate?
Now, let’s take a look at all the positive facts about investing in real estate and what are the reasons behind its large market all around the world. Investing in real estate is;
- Secure because it is a tangible asset. There is proper documentation involved which can later act as proof when in need.
- Versatile because of all the options available including funds, investment plans and then different types of properties.
- A long term investment as it gives you reward in the form of rent or any other means for a longer period of time.
- Beneficial in a way that government offers a lot of tax relaxations on properties in order to push the sluggish market when in need
- Directly proportional to inflation. As inflation increases, house prices will also increase
- Offering low mortgage rates due to Covid’19 so you will have to pay a lesser amount of your income as an investment
Things You Need To Consider
With all those advantages, you also have to think about the other side before investing your money. So, real estate investment;
- Is not fluid because it is not easy to take out your money invested in a property. It takes time and effort to either sell it or give it on rent etc
- Requires high maintenance every now and then to keep it in good shape. You have to pay the utility bills and keep everything in order before selling it out at a good price
- Requires a lot of investment; however , it varies with the type of property.
In short, every type of investment has its own risk associated with it. You just need to see how much risk you want to take and how much you can afford. It all depends on your personal experiences and the market at the time of investment. Both can be a good investment opportunity but the research before doing so along with the guidance of your financial advisor is necessary.
