Tag: Cryptocurrencies

Gallup released a report on Americans’ favorite long-term investment options. The findings showed that the top 3 investment assets were real estate, gold, and stocks.

Investing in either one of these could prove a prudent decision, but which is best?

The statistics show at least 65.9% of Americans own their homes, while 61% own stocks. Only 38% of retail investors have ownership of physical gold. Considering a survey asserts that 40% of American adults now own cryptocurrencies, we’ll include it in this analysis.

We’ll provide all the top reasons for investing in each of these assets, possibly helping you determine the best option.

A. Why Invest in Real Estate

In the 2023 Gallup report, 34% of Americans thought real estate was the best long-term investment. And it’s easy to see why.

Real estate is often at the apex of passive income streams, as its value generally increases over time and helps its owners build equity. Further, real estate is a great hedge against inflation since a rise in inflation almost always means an increase in prices, delivering positive returns in the long run. Here’s why you should consider investing in real estate:

1. Appreciation

Fluctuations in interest rates influence the mortgage rate and real estate affordability, consequently impacting demand for real estate. The current 30-year fixed mortgage interest rate average of 7% is partly to blame for the stratospheric rise in housing prices.

Predictably, housing affordability has been on the decline. The National Association of Realtors (NAR) found that a 7.7% increase in monthly mortgage payments in March 2024 year-over-year (YoY) contributed to a 4.7% increase in the median home price.  

Despite all this, home prices continue to rise, reaching all-time highs of $552,600 in Q4 2022 and still persist beyond the half million mark to date. Even with the stubbornly high mortgage rates, home sales remain beyond the 4 million mark, only dropping below this once in 2023.

Real estate performance over time

Source: https://www.redfin.com/news/housing-market-value-hits-record-high-2023/ 

2. Hedge against inflation

Generally, a strong economy fuels housing demand as more people have the money to buy homes, and the opposite is true.

For instance, the US economy faced headwinds in the past four years, with the economy contracting for consecutive quarters in 2022 and 2023, hitting lows of -2% in Q1 2022. The Federal Reserve (Fed) instituted a series of interest rate hikes in a bid to tame runaway inflation.

Despite this, median rent prices hit all-time highs of $2,054 in August 2022. Home median sale prices also reached all-time highs of $432,525 in May 2022 and still lurk beyond the $420k mark to date.

3. Diversified portfolio

You might think the real estate industry is a monolithic investment path limited to buying and selling property, which is a preserve of the rich. However, it is much wider than this, enabling even investors of modest means to dip their toes in the industry:

• Renting out property: Purchase and let rental property. Use the proceeds of the rent to pay the mortgage fees. Only 65.7% of American adults own their own home as of Q4 2023, so there’s still plenty of market for rental housing.
• Real Estate Investment Trusts (REITs): Combines the liquidity of a stock with the ease of owning…a stock. Investors earn returns from real estate appreciation and dividends, too. National Association of Real Estate Investment Trusts data shows REITs outperform stocks on 20-50 year horizons, providing 12.7% annual returns vs 10.2% average stock market return from the S&P 500 between 1972 and 2023.

Nareit performance.

Source: https://www.fool.com/research/reits-vs-stocks/

• Real estate platforms: These platforms unite investors with developers seeking capital to finance projects. While some only allow accredited investors, some take advantage of fractional ownership, allowing investors to only purchase a fraction of the property. Fractional ownership has found some usage in the blockchain, enabling the tokenization of real estate properties.

B. The Case for Investing in Crypto

Cryptocurrencies have acquired a bad reputation for volatility, but high risk can come with great rewards. Understanding the characteristics of this emerging market could potentially hold the key to higher returns.

1. Potential for high returns

Most cryptocurrencies, like Bitcoin, have a supply cap. A limited supply creates scarcity, which might increase its value over time.

Bitcoin also has halving events, which slows down its rate of production. These halving events have historically led to increases in Bitcoin prices.

After the first halving event in 2012, Bitcoin’s price rose by 145% in the first 90 days, 982% after 180 days, and 7,851% a year after. On average, its price has increased by 2,908% a year after each halving. Even the most conservative uptick happened during the second halving, where the price appreciated 279% a year later.

Bitcoin has outperformed all other major asset classes in eight of the past ten years (2013-2023). Since its inception, Bitcoin has recorded 116.01% annualized returns compared to its nearest competitor, the S&P 500 index, which managed 13.48%.

Bitcoin vs. other asset classes

Source: https://www.visualcapitalist.com/bitcoin-returns-vs-major-asset-classes/

2. Could be a hedge against inflation

Fiat currency is controlled by Central Banks, which can influence it to achieve a favorable outcome. Cryptocurrencies are different as they operate on the principles of decentralization, free from manipulation by any entity.

Cryptos like Bitcoin also go through halving events, which cut down their supply by 50% at set intervals. These measures ensure cryptos do not face the same inflationary pressures triggered by fiat currency supply growth, which could minimize loss of value due to inflation.

C. Why You Should Try Gold

Gold has held a special place in investors’ portfolios for a long time. It is the go-to investment in times of geopolitical and economic uncertainty for various reasons:

Gold reaches all-time high

Source: https://www.xm.com/research/analysis/allNews/xm/technical-analysis-gold-unlocks-fresh-all-time-high-again-195318

1. Hedge against inflation

Gold has a proven track record of holding value, making it the perfect medium to hedge against inflation in times of economic turmoil. It has an inverse relation to other types of investments, usually rising in value when the economy is on shaky ground.

For instance, while the value of the S&P plummeted by 56.8% during the 2007-2009 financial crisis, the value of gold rose by 25.5%. Its value increased by 101.1% between 2008 and 2012.

It’s also a great option when faced with market uncertainty. When the Israel-Palestinian conflict began in early October 2023, gold prices gained 6.8% within a few weeks.

While inflation has failed to dial down to the Fed’s target of 2% since 2021, reaching highs of 9.06% in June 2022, gold rose by 8.57% between February and March 2024, easing past $2,300 an ounce, an all-time high.

2. Store of value

Gold prices are relatively stable compared to other investment assets like stocks. Using the Dow Jones Industrial Average (DJIA) as an example, gold has outperformed it in 43% of the years between 1925 and 2015, despite only a 2.1% average return annually compared to 7.3% for the DJIA.

Even during times of recession, the two-year average return for gold is about 1.65%, while the DJIA dipped to lows of 55% during the Great Depression in the 1930s. Gold even remains stable in the good times, performing 13% better on average in 26 of the 65 years without a recession.

Gold’s performance over the years

Source: https://www.economicsobservatory.com/is-gold-a-safe-haven-for-investors#:~:text=Over%20the%20past%20100%20years,%25%20(see%20Figure%203).

D. Reasons to Invest in Stocks

A 2023 Gallup survey found that 61% of Americans own stocks. Stock ownership, on average, was 62% between 2001 and 2008. The top 1% hold 49.4% (worth $19.7 trillion), while the top 10% own 93% of all stocks. What is the allure of stocks?

1. Potential for higher returns

While stocks might be perceived as high-risk investments, they also possess the potential for high returns. They certainly provide higher returns than conventional investment options like gold, treasury bonds, and bank deposits.

For example, stocks returned a 10.4% yearly average between 1989 and 2017, compared to just 6.1% for bonds over the same time. Returns from the stock market can go as high as 40% yearly, but beware—they can also dip by as much as 40%.

2. Beat inflation

While stock prices are volatile, they tend to level off in the long run. Therefore, they are a great option as a hedge against inflation for long-term investors. As studied over the past 35 years, the stock market shows a positive return in nearly every 7 out of 10 years.

The average inflation rate has hovered around the 2 to 3% mark for the past 20 years (2003 to 2023), with the long-term inflation rate at 3.1% since 1913. Large domestic stocks recorded an annualized average return of 7.7% (or 9.8% with the dividends reinvested) over the same 20-year period.

Historical performance of the S&P 500

Source: https://www.macrotrends.net/2526/sp-500-historical-annual-returns

3. Promising short-term investment

Nevertheless, one of the biggest draws for investing in stocks is the allure of handsome short-term returns. With luck, investing in stocks can yield astronomical returns.

While extremely rare, it is not unheard of to see a stock’s price jump 100% in a single day. For example, Gateway Industries stock rose 18,000% in a single day in February 2011 following a takeover announcement. Currently, meme stock AMC rose by as much as 120% on May 15, 2024, while GameStop finished the day 60% higher.

4. Liquidity

Stocks are generally perceived as highly liquid assets since you can convert them into cash more easily than investments like real estate.

For instance, the Nasdaq witnesses more than 4.4 million shares traded daily, involving more than 31 million trades. This is several magnitudes higher than the real estate industry, which only experiences about 4 million units traded monthly.

Stocks also list on stock exchanges with nationwide coverage, which means investors usually have a sea of buyers willing to take the stocks off their hands, for the right price.

5. Variety

Investors have a wide array of stocks to choose from, each offering different benefits:

• Common shares: The most common type of equity investment. It offers a chance for capital growth when prices rise, earning dividends, voting for directors who run the company, and advantageous tax treatment.
• Preferred shares: Reliable income stream and dividends paid before common shareholders. It offers higher income compared to common shares, with some allowing investors to plow the dividends back into the company.

A qualified dividend is a common dividend that meets the qualification requirements set by the IRS. Qualified dividends are usually charged at a capital gains tax rate, which can be lower than the income tax imposed on some taxpayers.

Investor Considerations

There’s no one-size-fits-all approach to investing since every investor has a unique set of circumstances that make them suited to one investment approach over another. These should be your top considerations before choosing any of these investment options:

Risk tolerance

Before investing, ask yourself, “How much risk am I comfortable with”? Understand that every investment carries some level of risk, although some are less risky than others.

From the choices above, crypto and stocks are the riskiest due to their high volatility. Gold and real estate are far less risky, so choose what fits your risk management strategy.

Younger investors have time on their hands, so they can either try the riskier options or settle on safer, longer-term options and reap the rewards of compounding.

Investment horizon

How long do you intend to hold your investments? Some investment assets, like stocks and crypto, are excellent for short-term trading, while others, like real estate, only really work if you hang on to them for the long term.

Liquidity needs

If you have no emergency fund, invest in stocks, gold, or the most popular cryptos since they are more liquid. Real estate is off the table as it is less liquid.

Investment goal

What is your goal? Are you aiming for income, capital appreciation, or a combination of both? The answer to this will determine which investment option is best.

For instance, gold might be great for capital appreciation but not for income generation. Most forms of real estate investment offer both appreciation and income, and the same goes for some stocks and cryptos.

Liquidity needs

What is your goal? Are you aiming for income, capital appreciation, or a combination of both? The answer to this will determine which investment option is best.

For instance, gold might be great for capital appreciation but not for income generation. Most forms of real estate investment offer both appreciation and income, and the same goes for some stocks and cryptos.

 

Conclusion

Stocks, gold, cryptos, and real estate are desirable investment options, each with its own pros and cons. Cryptos and stocks can be great for the short term; gold generally retains its value, while real estate usually appreciates in the long run.

Remember, all investments carry some risk, although some are riskier than others. There’s no universal approach to investing, as the best investment choice depends on your specific goals and financial situation. Exhaustively consider your investment horizon and risk tolerance to make informed choices.

For your own good, consult a financial advisor for personalized advice, especially if you intend to spend huge sums.

The prices of goods and services were out of control in 2021 and 2022. Egg prices rose by 59.9% between November 2021 and a year later, with elementary and secondary school meals spiking 305.2% during the same period.

This was all thanks to rampant inflation.

The Consumer Price Index (CPI) hit 9.06% in June 2022 (the highest in 40 years), compared to just 0.12% in May 2020.

Inflation is a consequence of the price of goods and services rising over a sustained period, eroding the purchasing power of earnings and savings.

The inflation rate has since dropped off to a more reasonable 3.36% in April 2024, still some way off the Fed’s target of 2%. But if you think the price of goods and services is still unreasonable, you’re on to something.

Despite the drop in inflation, prices rose by 20.8% from February 2020 to 2024. Even the best high-yield savings accounts don’t provide such yields, so your savings would feel the pinch of the inflationary pressures.

So, could cryptocurrencies guard your savings against the ravages of inflation? Let’s find out.

The Threat of Inflation on Your Savings

It is actually desirable for the prices of goods and services to rise over a number of years. But inflation must be moderate for it to benefit a country.

High inflation is triggered by the rapid rise in prices, while deflation, where prices are falling, means the economy is stagnant, experiencing little to no growth. Moderate, stable, and predictable inflation is good as it allows business owners to keep growing and pay their workers higher wages.

When inflation rises, it erodes the dollar’s value, eating into the buying power of your money. If your savings do not grow at the same rate as inflation, you are losing money. You won’t have the capacity to keep up with the cost of living, as inflation curtails your ability to purchase as much as when you began saving.

If you are saving for retirement, you won’t meet your target unless you keep saving more to beat inflation. But that will be a lot harder since commodity prices will rise, making it more difficult to save an extra coin.

The only way to beat inflation is to place your savings in an investment offering a higher interest rate than the inflation rate, and that’s where cryptocurrencies could come in handy.

Characteristics Favoring Cryptocurrencies’ Inflation Protection

Normal/fiat currency is susceptible to inflation because it is subject to manipulation. A country’s Central Bank can print more money in the face of undesirable economic climates.

An example is when the US printed money in 2020 and handed out about $1 trillion collectively to individuals as part of the COVID-19 stimulus package. This partly contributed to the consequent 40-year high inflation rate.

Here are some features that make crypto the go-to solution for fighting inflation:

1. Limited supply

Unlike the case of a Central Bank printing a limitless supply of a fiat currency, most crypto have a predetermined maximum supply in their code. They are finite resources, creating scarcity.

Crypto scarcity is ripe ground for a potential hedge against inflation, as demand for the limited supply could lead to an increase in value.

Bitcoin, with a lifetime supply of 21 million coins to be mined by the year 2140, is a prime example. Research provides evidence that Bitcoin prices usually appreciate against inflation shocks.

2. Decentralization

Cryptos are also free from Central Bank manipulation. They operate on decentralized networks that are not controlled by any entity. This allows cryptos to operate independently. A Central Bank can implement fiscal control by printing more money, leading to inflation.

3. Transparency

The blockchain allows for transparency by displaying all transactions made using a particular crypto. Further, the transaction information is immutable (can’t be changed).

Independent parties can track and ascertain all transactions, making it harder to arbitrarily increase a crypto’s supply without detection. These measures ensure a stable operating environment, reducing the probability of supply inflation.

4. Deflationary tendencies

With time, cryptos are burned while in use. Others are locked in wallets and passwords are forgotten, never to be retrieved. This removes them from circulation, making the crypto deflationary and creating further scarcity.

A WSJ analysis suggests there are about 20% or 1.8 million “lost” Bitcoin worth nearly $20 billion, and it is highly unlikely they’ll be recovered.

How Has Crypto Performed During Inflationary Periods?

Yes, cryptos are volatile, but they have displayed some resilience in the face of high inflation. For instance, in the first half of 2020, Bitcoin rose by 27%, higher than gold, silver, and platinum, which have long been the traditional hedges for inflation.

Despite gaining 16% during the same period and reaching 8-year highs in June, gold still underperformed the crypto by nearly 11%. Platinum and silver registered negative gains during this time.

This was during a recessionary period, with inflation rising from 1.6% in June 2019 to 2.5% in January 2020, then dropping sharply to 0.2% in May 2020 before rising to 40-year highs in 2022.

For a while, cryptos did well despite rising inflation in 2020 and 2021, with Bitcoin gaining 60% in returns in 2021. Most cryptos were affected by high inflation rates due to diminished purchasing power and devaluation of the dollar.

But when inflation kept soaring and blew past the 9% mark in 2022, cryptos and even commodities felt the heat and plummeted in value. With investors seemingly scared of the riskier investment, Bitcoin lost 64% of its value in 2022.

However, when the Fed eased off its interest rate hikes in 2023, and the CPI cooled to a more manageable yearly average of 3.4%, the narrative changed. Bitcoin gained 156% of its value YoY in 2023, with prices rising to $43,700 in December 2023, up from lows of $16,529 in December 2022.

Overall, cryptos are too new to provide a definitive answer to their claim as a hedge against inflation. Research shows cryptos have positive real returns correlated to inflation but not nominal returns. This suggests cryptos can stop an investor’s money from losing purchasing power as a result of inflation.

Using Bitcoin as an example, the evidence for or against the assertion that cryptos are a hedge against inflation is erratic. Its price performance over time has not supported either thesis conclusively, as it remains relatively untested in diverse economic scenarios.

How do cryptos compare to traditional assets?

There’s no definite correlation between precious metals price performance and inflation. Sometimes, they lose or gain value, all dependent on market sentiment.

For instance, gold gained by nearly 600% between 2000 and 2011, when the inflation was relatively stable, but lost nearly half its value from 2011 to 2016, when the inflation rate was around the Fed’s long-term desired inflation target of 2%.

In 2021 and 2022, when the CPI was 7.2% and 6.4%, gold sank by -3.5% and -0.1%, respectively, but rose 13.4% when the CPI dropped to 3.3% in 2023. Gold reached an all-time high of $2,449 per ounce in May 2024, with inflation hovering around 3-4%.

An ETF that has been tracking the price of gold reported returns of 5.5% annually compared to 15.3% for the S&P 500 for the past 15 years. Although stocks typically perform poorly with rising inflation, they can act as a hedge against inflation in the long run.

Data tracking the S&P 500 shows the largest 500 capitalization stocks gained 10.7% on average since its introduction in 1957, but the average yearly inflation rate from 1914 to 2023 is 3.3%.

Bonds have also been perceived as a good store for value. They are a source of stable yet small gains. Although bonds yields steadily declined since the 80s, so did inflation, leading to sustained bonds yields over the years.

However, minor gains in bonds usually mean they will underperform in the face of strong inflation. If you invest in bonds with 4-6% yields, your investment will lose value faced with 8-9% inflation rates. As seen in recent years, investors have lost at least 1% of their bonds values annually from 2019 to 2023.

Crypto Portfolio Inflation Protection Strategies for Physicians

Investors must gauge the risk/return tradeoff before deciding which cryptocurrencies to invest in. Fixed income assets offer less risk but provide less returns compared to cryptos.

For example, Bitcoin has annual returns of 50% against 75% volatility, while Ethereum provides annualized returns of close to 80% and annualized volatility of 90%. By contrast, fixed-income investments offer less than 10% in annualized returns and volatility.

Using Monte Carlo methods and holding a 60/40 stocks and bonds portfolio, a simulation shows adding Bitcoin worth 5% of the total portfolio value offers the optimum Sharpe Ratio, a measure for risk-adjusted returns.

The Sharpe Ratio keeps rising until it gets to 5% before leveling off, showing no improvements in risk-adjusted returns after this mark. Although not entirely accurate, the results suggest holding 5% of Bitcoin in your portfolio is the optimal ratio for risk/returns.

1. Diversification across cryptocurrencies

The best way to mitigate cryptocurrency volatility is to spread your investments across several cryptocurrencies and blockchain assets like NFTs.

This should guard against the risks of investing in a single crypto and reap the rewards of emerging trends. For instance, NFTs had a great run in 2021 through 2022, with the top 10 most expensive pieces being sold for over $7 million during this time.

2. Consider Risk Tolerance and Investment Timeframe

What are your investment objectives? Do you wish to gain wealth in the long term, or are you seeking the thrill of short-term gains? Your goals should help determine which investment strategy to settle on based on the volatility prospects of each asset.

Also, conduct an honest review of your risk tolerance to establish your comfort level. It will help you choose a crypto or asset aligned to your investing style and minimize chances of abandoning strategy mid-investing.

3. Investing strategies for managing volatility

• HODL: This refers to the long-term buying and holding of crypto. The strategy aims to ride out the price volatility, which will iron out to the investor’s advantage over time. A study of Bitcoin’s price since its inception points to an upward trajectory if held over a long stretch.

• Dollar-Cost Averaging: A practice where you make small amounts of recurrent purchases following a set schedule. This relieves the pressure of having to time the market or missing out on opportune moments to buy. In the long run, it reduces the impact of volatility. Investors may make extra purchases when there are significant market dips.
• Active trading: If you have the time, score short-term gains by frequently buying and selling crypto to exploit crypto volatility. This strategy requires extensive market research and is the most high-risk tactic.

Considerations and Risks

The most common risks and considerations include:

• Volatility: The bane of every investor. Cryptocurrencies are notoriously volatile, so prepare a strategy to mitigate this risk and avoid being swayed by emotions.
• Security: There were 283 crypto theft incidents in 2023, with $24.2 billion received by illicit addresses. As of 15 January 2024, $8.37 million worth of crypto had already been reported stolen. Ensure you install sufficient security measures to prevent incidents of hacking and fraud.
• Regulatory: It is still a relatively new market, so new regulations keep cropping up in different states as legislators come to grips with cryptocurrencies. These new laws may introduce unforeseen risks.

Can Crypto Be Your Inflation Shield?

Most cryptocurrencies have a fixed supply that promotes scarcity. Additionally, they are based on decentralization, suggesting they are prime candidates for inflation protection.

However, being new entrants in the market, they have not yet faced wide-ranging economic scenarios. The data on their performance amidst rising inflation is limited, so it is impossible to draw conclusions on their efficacy as solutions against inflation.

Like any other investment class, cryptocurrencies come with some level of risk. If you intend to spend large sums on purchasing some in an effort to beat inflation, it is in your best interest to seek the services of a financial advisor with crypto experience.