Buying a house is often the biggest financial expenditure in a person’s life. It is not only a consideration for investment but also for personal living needs. Overall, buying a house is one of the most mainstream investment methods today, or rather, buying a house is like an exit strategy as the goal of investment is often to buy property.
As a newly emerged asset in recent years, how does buying a house compare to buying cryptocurrency in terms of investment?
This article will compare buying a house and buying cryptocurrency from the perspectives of historical price fluctuations, tool characteristics, and risks. It will examine the characteristics and advantages and disadvantages of each. If you are curious about these two investment methods or are currently deciding where to invest your funds, this article is for you.
Buying a House vs Buying Cryptocurrency: Which is more profitable? Five-year comparison of price fluctuations
Comparing buying a house and buying cryptocurrency, we will not focus on specific regions or specific currencies, and we will not compare too far back in time. The timeframe considered is the past five years.
The housing price data used is the Residential Price Index of the Ministry of the Interior, covering the entire Taiwan region. Since the latest data is only available until 2023 Q4, the five-year period considered is from 2018 Q4 to 2023 Q4.
The cryptocurrency data used is the total market capitalization of cryptocurrencies. Comparing based on market capitalization is not very accurate compared to price, but there is currently no cryptocurrency index available. If we only compare the price of Bitcoin, it would be too specific. The overall market capitalization provides some reference, although it has a slightly magnifying effect. However, when reading the data, we should take it with a grain of salt.
The price fluctuations of the two are vastly different, and they would be compressed and difficult to distinguish on a normal chart. Therefore, a logarithmic scale is used to mainly show the trend of fluctuations.
At first glance, buying cryptocurrency seems to be much more profitable than buying a house. However, there are many differences in details. For example, buying a house usually involves leverage (mortgage), and this is overall data, with significant individual differences such as the location or property for buying a house, and the type of cryptocurrency and asset security issues for buying cryptocurrency.
Setting aside the individual differences, let’s directly compare the two most important numbers:
Maximum increase during the period: Buying a house +35.52% / Buying cryptocurrency +1796.27%
Maximum decrease during the period: Buying a house, none, as the index has increased every quarter / Buying cryptocurrency -64.4%
But once again, it is worth noting that the cryptocurrency data used here is not the price but the market capitalization. Relative to the price, market capitalization is influenced by the circulation of issued coins, which slightly amplifies the increase and reduces the decrease. As a reference, the maximum increase of Bitcoin during the same period was +1775%, and the maximum decrease was -76%. The cryptocurrency data mentioned above should be taken with some caution.
Investing in Real Estate | Relatively Stable and Leverageable
Although looking at the maximum increase, it seems that buying a house is much worse than buying cryptocurrency, the volatility of housing prices is much smaller than that of cryptocurrencies. Over the past five years, the market capitalization of cryptocurrencies has experienced a major collapse of more than 60%, with Bitcoin’s price falling by 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 and has consistently shown an upward trend in the six major cities, with very few and small decreases.
In terms of stability, buying a house is greater than buying cryptocurrency.
Buying a house usually involves preparing a portion of the down payment and obtaining a loan. The loan-to-value ratio depends on factors such as the location and condition of the property and the creditworthiness of the applicant. In general, the down payment ratio is between 20% and 30%. In other words, buying a house usually involves a financial operation with a leverage of 3.3 to 5 times. Mortgage loans are the cheapest among all funds, with the lowest interest rates. In other words, mortgage loans are the most cost-effective 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 down payment is not the full amount. Buying a house with a mortgage is a form of leverage.
Mortgage loans are the lowest-cost leverage tool, and some people use them for investment purposes. For example, some people only pay the interest on mortgage loans without repaying the principal to reduce the monthly repayment amount, while using the remaining funds for investment. Others use a refinancing strategy to borrow against the increased value of the property after it has appreciated.
In terms of leverage cost, buying a house is greater than buying cryptocurrency.
The so-called leverage cost refers to the cost of funds. Since leverage involves borrowing money for investment, interest must be paid on the borrowed money. The main cost of leverage is the cost of funds, which is the interest rate on the borrowed money. Currently, mortgage loan interest rates are around 2-2.5%, general credit loan interest rates are 3-15%, and stock brokerage loan interest rates are 6-7%.
Buying Cryptocurrency | Lower Threshold, Higher Potential Returns, Better Liquidity
Usually, buying a house is done on a per-unit basis, with the price of a single house ranging from hundreds of thousands to tens of millions. A single transaction is equivalent to buying one house unless it is a joint venture under special circumstances. Buying a house at once involves a significant amount of money, ranging from hundreds of thousands to tens of millions, considering a 20% down payment. At least two to three million dollars must be prepared.
Buying cryptocurrency 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 you may not be able to afford one whole Bitcoin priced at two million Taiwanese dollars, one satoshi Bitcoin is only 0.02 = 2 cents. However, most exchanges have a minimum trading amount limit, so it is not possible to buy just one satoshi at a time. The minimum transaction amount is usually around 5-10 U, equivalent to about 150-300 Taiwanese dollars. While we need two to three million dollars to buy a house, we can start buying cryptocurrency with just a few hundred dollars.
In terms of capital threshold, buying cryptocurrency is greater than buying a house.
As a newly emerged asset, the price of cryptocurrencies has had a tremendous increase. Bitcoin is the most well-known cryptocurrency, and many people who have not yet been exposed to cryptocurrencies may find Bitcoin’s volatility too high. However, compared to other cryptocurrencies, Bitcoin is 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 among them. These are not unknown high-risk small coins, but the top five cryptocurrencies by market capitalization (excluding stablecoins) with price increases ranging from hundreds to thousands of percentage points and a maximum increase of over ten thousand percent.
In terms of potential return rate and price explosiveness, buying cryptocurrency is greater than buying a house.
However, from the chart, we can also see that during the same period, housing prices in Taiwan have been steadily rising, with few decreases and small magnitudes. On the other hand, cryptocurrencies are a different world, with astonishing volatility despite their explosive growth. While the potential returns and price explosiveness of buying cryptocurrency are higher, the fluctuations are also high.
As mentioned earlier, buying a house is relatively more stable compared to buying cryptocurrency, while buying cryptocurrency 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 an asset be sold and converted into cash? If an asset can be sold quickly and without affecting the price, we say it has good liquidity.
When buying and selling houses, because buying a house may be the largest financial expenditure in a person’s life, people usually do not act impulsively and have to go through many procedures and evaluations.
The process of a housing transaction usually involves the following steps:
1. Posting information about the house for sale.
2. Buyers viewing the house.
3. Buyers making offers and negotiating prices.
4. Waiting for the bank to evaluate the loan-to-value ratio.
5. Signing contracts, running credit evaluations, and completing the handover process.
The entire process takes at least several weeks to several months. If you do not want to sell at a lower price, it may take even longer. If you want to sell faster, you may have to lower the price to some extent.
Although people often say that real estate retains its value, real estate is not considered a highly liquid asset. When there is a need for liquidity, it takes time or a sacrifice in price to sell quickly.
The cryptocurrency market operates 365 days a year, 24 hours a day for trading, and the trading volume is extremely active. Unless it is a large-scale transaction involving hundreds of millions, for transactions within the scale of tens to hundreds of millions, it can almost be sold within seconds to minutes on mainstream exchanges without suffering significant discounts.
When selling, you receive the cryptocurrency, and then you can exchange it back into Taiwanese dollars and transfer it to your Taiwanese bank account. Generally, it takes 1-3 days to complete this process through Taiwanese withdrawal channels. If you choose to sell on foreign exchanges and receive US dollars through wire transfer to a foreign currency bank account, the foreign currency transfer may take a little longer, around 3-5 days.
In terms of liquidity, buying cryptocurrency is greater than buying a house.
Buying a House vs Buying Cryptocurrency | Inflation Resistance Comparison
Inflation =Inflation usually refers to the rise in prices, which reduces the purchasing power of money. The concept of “inflation resistance” means investing money in assets that have a growth rate equal to or higher than the inflation rate, so that purchasing power is not reduced and inflation is effectively resisted.
In other words, if most of your assets are solely held in the bank, in the face of rising prices, they will depreciate in the long run.
This is the trend of consumer prices in Taiwan during the same period (2018 Q4 – 2023 Q4), with a total price increase of 9.55% over five years. Whether it is buying a house or buying cryptocurrency, some people claim it is an investment that resists inflation. Looking at the performance of buying houses and buying cryptocurrency over the past five years, their growth rates have indeed far exceeded the increase in consumer prices, proving their effectiveness in resisting inflation.
However, let’s take a look at this circulating image on the internet:
(Of course, this is not Taiwan, but the situation in Taiwan is similar. Based on this image, we can draw a simple conclusion:
Compared to the rise in prices, housing prices will rise, and houses do have the effect of resisting inflation in the fiat currency.
Compared to the rise in housing prices, Bitcoin has risen even more, not only resisting inflation in fiat currency but also in housing prices.
Comparison of Risks in Buying Houses vs Buying Cryptocurrency
This mainly focuses on the risk comparison of investments, and the main risks fall into several categories:
Risk of losing assets: In the case of houses, for example, being deceived into transferring the house to a fraudulent group, or natural disasters causing damage to the house; for cryptocurrencies, being phished or scammed, or wallet private key leakage due to cybersecurity issues, etc. In order for a house to be transferred to a fraudulent group, it would require being deceived through several steps, but for cryptocurrencies, being scammed only once or twice can result in a complete loss. The probability of losing a house due to natural disasters is much lower than the risk of personal cybersecurity. In terms of the risk of losing assets, buying cryptocurrencies has a higher risk.
Risk of price decline: As we can see from the historical trend, the price of cryptocurrencies fluctuates much more than housing prices, and not only does it fall more frequently, but it also falls more significantly. Therefore, the risk of price decline is still higher for buying cryptocurrency.
Liquidity risk: Cryptocurrencies have much better liquidity than houses, and when liquidating, cryptocurrencies can be converted into cash at a faster speed. In terms of liquidity risk, buying cryptocurrencies has an advantage.
Risk extended by leverage: Leverage involves borrowing money. In the case of buying a house, if one day the mortgage cannot be repaid, the house 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 investigation and confiscation to other assets, which means that the risk will spread. Although housing loans are secured by houses, if the collateral is insufficient, the risk will spread to other assets. Cryptocurrencies are different. Apart from borrowing money to buy cryptocurrencies in the real world, leveraging through mechanisms in the cryptocurrency can also require collateral. When problems occur and liquidation takes place, once the collateral is settled, the risk ends. The most that can happen is losing the collateral. Therefore, the risk of leverage extending to other assets is higher for buying houses.
Comparison of Passive Investment and Returns in Buying Houses vs Buying Cryptocurrency
Passive investment has become popular in recent years. Active investment is often influenced by personal subjectivity and usually does not perform as well as passive investment in terms of stability.
But buying houses is difficult to be a passive investment. Firstly, there is no housing price index that can be invested in. Secondly, it is also difficult to form a real estate investment portfolio. A single house costs millions or even tens of millions, so how much capital is needed to play in the real estate investment market? Most people can afford only one to three houses, which is far from enough for a diversified risk passive investment. Therefore, buying houses is basically an active investment.
Although there is no cryptocurrency market index, there are already related tools that provide similar functions, or one can also create their own investment portfolio by including the top mainstream cryptocurrencies and major projects. This can create a passive investment portfolio that approximates the market.
In terms of the feasibility of passive investment, buying cryptocurrency is better than buying houses.
Some individuals are not pursuing passive investment but passive income. Both buying houses and buying cryptocurrency can generate passive income. Buying houses usually involves renting out the property, while buying cryptocurrency involves operations such as staking. Both can generate passive income.
This part has its own advantages and disadvantages. The passive income from buying houses requires management, such as finding and managing tenants, and maintaining the property. It has certain management costs, but the advantage is that once rented out, stable passive income can be obtained every month.
The simplest form of passive income for cryptocurrencies is staking, which usually only requires interacting with the contract once or twice to complete. There is no need for additional management, and there are no management costs. However, the income from staking is also in cryptocurrency form, and cryptocurrency prices fluctuate. Therefore, passive income is not as stable.
Comparison of Pros and Cons in Buying Houses vs Buying Cryptocurrency
Buying a House
Buying Cryptocurrency
Five-Year Performance Increase
35.52%
Nearly 1800%
Stability and Preservability
Relatively stable and better
Poorer, with greater volatility
Volatility and Risk of Decline
Less likely to decline significantly
Poorer, with more drastic drops
Leverage Cost
Better, with lower mortgage rates
Poorer
Leverage Ratio
Usually 3.3 – 5 times, in special cases it can be higher, but unlikely to exceed 20 times
Can go up to 125 times
Risk of Leverage Extending to Other Assets
Poorer, with risks spreading
Better, as liquidation ends the risk
Liquidity
Poorer, selling a house and cashing out takes at least a few weeks to months
Better, can sell within seconds and exchange for fiat currency within a few days depending on the channel
Participation Capital Threshold
Higher, at least a few million
Lower, can start with a few hundred dollars
Trading Convenience
Poorer, need to wait for the seller, the intermediary, the bank, and the transfer process
Better, can open an account within minutes, trade using a mobile phone, and the market is open 24/7, 365 days a year
Trading Costs
Higher, higher costs for buying/selling a house, taxes, etc., accounting for a percentage of the transaction amount
Lower, exchange fees are mostly below 0.1%
Asset Security
Better, excluding natural disasters and accidents
Poorer, higher cybersecurity and fraud risks
Feasibility of Passive Investment
Almost not feasible unless for very large investors
Feasible even for small investors, using DCA tools for continuous passive investment
Stability of Passive Income
Better, but higher management costs
Almost no management costs, but income is less stable due to cryptocurrency price fluctuations
Sense of Security
Better, houses are tangible assets
Poorer, cryptocurrencies are virtual and intangible
Learning Resources
Mature market with many free and paid resources available
Many learning resources, but due to the early stage of the market, more filtering ability is needed. It is recommended to follow daily cryptocurrency research to get started.
Summary – Buying Houses vs Buying Cryptocurrency: This is Not Just a Financial Decision
The article provides a comparison between buying houses and buying cryptocurrency, but it is not just a financial decision; it is also a life choice. Buying a house is not only a consideration for investment but often involves the need for personal residence and maintaining a credit history with banks, among other factors.
The assets you invest in also affect how others perceive and understand you to some extent. When people around you know that you invest in real estate or cryptocurrencies, their perception of you may change.
It also involves choosing a lifestyle and pace of life. Dealing with the high volatility of cryptocurrencies and keeping it from impacting your life completely is challenging and requires more mental training. However, perhaps you enjoy this fast-paced lifestyle.
There is also the assessment of the future and risks. As a physical asset, houses are exposed to risks that virtual assets do not have, such as natural disasters and wars. In the face of these special risks, cryptocurrencies are a more portable and flexible asset choice.
In practice, buying houses and buying cryptocurrencies are not mutually exclusive and can both be pursued. By properly allocating assets, one can enjoy the advantages of both and avoid the disadvantages.
How to choose between buying houses and buying cryptocurrencies? There is no need to make a choice; we can have both.
This article is a collaboration and was originally featured on Daily Coin Research.
