Soundbite: Bitcoin, Crypto-currency & property: Does it add up?

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I have started monitoring Bitcoin and other crypto currencies of late and my observations are that it is all completely bonkers really!

Don’t get me wrong, as I will reveal later, I am having a bit of fun with Bitcoin and some of its friends, but can we use it in our property business, can we invest in it in reality and most importantly can we really trust it?

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Resources mentioned

The docu-film called Banking on Bitcoin

"Bitcoin is better than currency" - because it is cheap, instant and electronic.” Bill Gates.

"Stay away from it. It's a mirage, basically...The idea that it has some huge intrinsic value is a joke in my view." Warren Buffett.

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Today’s must do’s

Honestly, you might just be well-advised to follow the advice of Warren Buffett and stay away from Bitcoin and other crypto-currencies! If you do decide to have a flutter, remember that it is probably just that…a speculative gamble. So don’t commit a significant portion of your investment capital to it unless you fully understand it and the risks involved. Equally, perhaps take your original stake or your profit out regularly to invest in safer, more established assets such as property might be a wise choice.

Do keep an eye on the underlying technology of the blockchain and its potential uses in the medium-to-long-term however.

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Transcription of the show

Hello and welcome to another episode of The Property Voice podcast. My name is Richard Brown and, as always, it’s a pleasure to have you join me on the show again today.

I have started monitoring Bitcoin and other crypto currencies of late and my observations are that it is all completely bonkers really!

Don’t get me wrong, as I will reveal later, I am having a bit of fun with Bitcoin and some of its friends, but can we use it in our property business, can we invest in it in reality and most importantly can we really trust it?

Let’s have a chat about these points now then shall we?

Property Chatter

OK, so I don’t plan to conduct a major lecture on the history of so called crypto-currencies, like Bitcoin and the Blockchain technology it sits on, however, a little background and context is probably going to be helpful given that many people still don’t know too much about the subject.

If you have ever seen the film, The Usual Suspects, then you might recall the big-up of a seemingly powerful and illusive character that goes by the name of Keyser Soze. Nobody had actually seen Keyser Soze it seems and yet he was both feared among the criminal community and highly sought for capture by the law enforcement community in equal measure. In fact, he was a legend and also the mastermind of a giant organised crime network.

Spoiler alert – close your ears for the next 30 seconds if you don’t want me to ruin your enjoyment of the film. Ready?

Right, so Keyser Soze of course did not exist, he was instead the figment of the imagination of Kevin Spacey’s character Verbal Kint, who was himself the real-life Keyser Soze, even though he appeared to be rather weak and inept as a part of his cover.

Cryto-currency and Bitcoin has its very own Keyser Soze, with the accredited founder of Bitcoin going by the name of Satoshi Nakamoto and just as with Keyser Soze, nobody actually knows who he is!

Needless to say, if you are interested in how it all started and the conspiracy theories around Bitcoin, then I would suggest that you watch the docu-film called Banking on Bitcoin, which I saw listed on Netflix…and watched on a recent British Airways flight!

Satoshi Nakamoto developed Bitcoin and launched it in 2009 just around the time of the last financial crisis. He intended for it to be used as “A Peer-to-Peer Electronic Cash System.” Note that is not specifically a currency at all, but instead a method for securely transferring digital records of cash between individuals.

Theoretically, it does not require banks or physical cash and notes. However, try buying and holding Bitcoin, or one of it’s alternatives, without using a market exchange to acquire it, a bank to fund the market exchange or a wallet to store the Bitcoins in after you have bought it! Yes, it is possible to transfer Bitcoins once acquired from person-to-person without using the exchange. This is then where a number of so-called miners check on an open source centralised ledger to verify that the Bitcoin is real, that you actually own it and then validate the transfer from you to someone else, recording the transaction in the ledger.

This process of mining uses complex algorithms and is checked at least 6 times to ensure accuracy. These checks, along with the open source central ledger that records all transactions is where the system gets it’s trust from. Everyone can see a Bitcoin’s owner, with its hellishly long unique serial number, and every transaction is recorded for all to see. Although, individual owner identities are protected from public view by an encryption mask, which has got governments and the tax authorities very twitchy.

There are various wallets that you can use to store your Bitcoins, such as online, in digital wallets on your smartphone, on an encrypted hard device such as a USB stick and also on paper. Of course, this also raises some questions around security and if you type Bitcoin and security into your web browser search engine you will no doubt find the MtGox $350 worth of Bitcoin loss among other hacks and losses reported from time-to-time.

That’s not exactly a glowing report for its security, but on the other hand, you will also see bank robberies and similar stories of theft, hacks and other scams with regular money too. So, it has its risks, as too do other forms of money holdings.

The final aspect of Bitcoin’s history that is important to share here is that it has an absolute limit of supply at around 21 million Bitcoins, which will be fully mined, or released into circulation by around 2140. It is perhaps this last point that has led to an array of speculators emerging that see this as an opportunity to clean up in a limited supply market.

With regular currencies, or so-called Fiat currencies, like Sterling, Euro, Dollar and such like, the money supply is not fixed and can be expanded, essentially by the printing of new money by Central Banks or by creating new deposits by regular banks. I don’t wish to get too drawn into how this happens, suffice it to say that the money supply with these Fiat currencies is not fixed whereas the supply of Bitcoin is.

This idea of a time-controlled issue in supply of Bitcoin, along with the maximum number of coins issued has given rise to its price being speculated, with it pushed up as demand exceeds supply. To put this into perspective, upon launch in around 2009, you could buy a full Bitcoin for less than $0.01. The price just before recording this at just over $6,100. This dramatic rise over the past 8 years and the past one or two, in particular, puts things into sharp focus no doubt.

This has led to crypto-currencies, including Bitcoins becoming an asset class, or sub-asset class in their own right. They probably more resemble precious metals, such as gold and platinum, with their limited availability and supply, than they do Pounds, Euros and Dollars. As such, are they a currency at all? Personally, I don’t see that they are given the massive price fluctuations and general volatility they have seen.

However, the technology on which Bitcoin sits, known as the blockchain, is certainly extremely useful and could assist in a range of low-cost, instant currency-related transactions where the banks would not need to be involved at all.

OK, so we have run through some of the background and context, now let’s look at how Bitcoin is being used today, with an emphasis on property naturally.

Firstly, a couple of brave souls have started to accept payments in Bitcoin. For example, a property developer in Dubai recently pledged to accept down-payments on off-plan properties in Bitcoin. Equally, a communal living provider in London has also recently announced that they will accept rental payments in Bitcoin as well.

When the story of the property developer accepting Bitcoin broke around August / September time I had a quick look at the US Dollar value of Bitcoin. Over a twelve-day period, the price of Bitcoin went from $4,116 on 28th August to $4,863 some 3 days later before falling back down to $4,132 just over a week after that. Now that’s a currency swing of plus and minus 18% in just under two weeks. Anyone would find that hard to handle, let alone property developers operating on a 2-year plus project!

Then, if we look at the rental equivalent for the communal living, or giant HMO, operation in London. Imagine for a moment that your market rent was say half a Bitcoin. On 3rd August 2017, the price of Bitcoin was the equivalent of $2,777, on 3rd September it was $4,632, on 3rd October $4,319 and as of today it is $6,100 as I mentioned.

This effectively means that your rent will have gone up by 120% in a few months. That’s possibly great news if you are a landlord…and happen to have tenants willing to pay your rent in Bitcoins, however, the opposite could just as easily have happened as well.

From the landlord’s point of view, they have the nightmare of managing the very volatile exchange rate with their rent and in reality, no tenants actually get paid in Bitcoin do they?

In short, how can anyone plan their business when this ‘currency’ is so volatile?

Now, I know what you are thinking…but the price of Bitcoin has pretty much gone up and in a pretty-big way, so surely you will always win in the long-run? Well, that’s the theory that a lot of people are working off right now and that’s part of the reason why the price keeps getting pushed up too.

However, is there any real substance behind these price increases,? I mean, what is a Bitcoin worth in reality? Can you use it for anything other than as a record of a transaction? Does it have any intrinsic value, like a commodity or property does? Could it be regulated or even banned from use? The answer to that last question is a definite yes by the way! It does rather have the look and feel of a Tulip bubble to me right now.

So, as a genuine currency it definitely has limited use right at this moment. I do see a lot of value in the technology it is built on though i.e. the blockchain. I can see a lot of uses for this technology as a means of ensuring safe and secure payment transfers and secure contracts, etc. I have no doubt one of the crypto-currencies, or the perhaps more so the blockchain platform technology it uses, might eventually become more mainstream and useful. In the meantime, it’s practical use rather depends on its level of adoption, which is not that high at all right now, despite the hype.

This then leaves us with looking at Bitcoin as an asset class instead. A storage of wealth and a means to trade on its value, as with stocks and gold for example.

I have traded in Bitcoin in a few different ways myself now:

1. Regular trading – where I bet on the price going up or down over a short time period.
2. Speculative investing – where I gamble on the price rising quite rapidly over the medium term.
3. Arbitrage – where I capitalise on price differences in different markets.

To be honest with you, none of these apparent strategies really make sense, especially if you don’t know what you are doing!

With trading, you need to understand why the price changes as it does and frankly I don’t 100% understand this, so I have not done much of that.

With the speculative investing on price increases, this is built on the assumption that the price will always go up. However, if you have experienced any market for long enough, you will fully understand that the price does not always go up. There is also the added risk of the currency being banned, as China recently did, or heavily regulated as the USA have done, to further complicate matters in this new market. So, I am regularly taking my stake out and just speculating with my profit here.

With arbitrage, I don’t really know why price differences exist in certain markets with a digital currency, but I have found that they have. Although, after a recent experience, I have also learnt that the pricing gaps between geographies now seems to be closing.

In short then, as an investment, it is highly speculative and so a complete gamble in truth! Personally, I am having a bit of fun with it, but only with a tiny percentage of my investment capital, just to see how it goes and learn more about it all quite frankly.

Now, I did mention earlier how does this all relates to property didn’t I?

Well, due to the wild price fluctuations, I don’t see buying, selling or renting property using Bitcoins catching on any time soon. So, as a currency medium, I don’t see the practical value for property investors in the short-term.

If you were to compare the returns from speculating in Bitcoin against speculating in property, frankly there would be no comparison, as the price of Bitcoin has literally exploded recently. However, given the various risks and uncertainty and a lack of intrinsic value, I would not want to be putting a large part of my investment portfolio into it. Have a little play by all means…but ONLY with money you can safely afford to write-off, as you might just have to do exactly that one day!

If you do have a play and do manage to pull off some wacky profits, then I would strongly suggest taking a large part of your profit out and storing it in income-generating, capital growing properties as you do. That’s probably a better bet and the best fit of Bitcoin and other cryptos with property right now I think. Maybe, just a little, taking the profit or your original stake out and investing that into good old bricks and mortar or other more time-tested asset classes I would say.

Of course, I have no intention of giving financial advice, this is merely an educational illustration and a personal insight into the art of the possible, along with my personal views. Make sure you seek professional advice and never risk more than you can safely afford to lose.

So, what about you – are you dipping your toe into the crypto waters? If so, how have you found it and where do you think it’s heading? Similarly, if you still have no clue and / or no interest in this strange phenomenon, then worry-not as normal property business will be resumed next week!

Finally, I will leave you with these two perspectives from some people that I respect a lot.

"Bitcoin is better than currency" - because it is cheap, instant and electronic.” Bill Gates. However, if you listen to his actual words in the interview referenced, he clearly states it is the technology behind Bitcoin that is going to most useful rather than Bitcoin itself.

"Stay away from it. It's a mirage, basically...The idea that it has some huge intrinsic value is a joke in my view." Warren Buffett.

Many smart people see it as an asset bubble that will eventually pop, so take care out there in crypto-land I strongly suggest!

Ok, in closing for today, you can of course email me podcast@thepropertyvoice.net if you want to talk about anything from today’s show or more generally in property investing. Also, the show notes will be over at the website www.thepropertyvoice.net

But for now, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao ciao.