Bitcoins and Real Estate: Are They Different?

After seeing the volatility in Bitcoin prices over the last month, some are calling it a bubble that is about to bust. Others are using it as an example to suggest that current residential housing prices are also approaching a bubble. Let’s look at the difference between the two.

The move in Bitcoin prices is being fueled by speculation. Analysts from Bernstein Research recently reported:

“Bitcoins do not provide investors with cash-flows or other benefits, but the maximum supply of bitcoins is fixed and so the price is driven by speculation on the potential demand for bitcoin.In this world, investors vacillate between the holy grail of bitcoin pricing becoming widely adopted and the price ‘going parabolic’ and the risk that actual value is close to zero.”

That is not to say that crypto-currency (ex. Bitcoin) does not have a future as a worldwide payment system. Last decade, home prices were driven to a large degree by speculation. That didn’t equate to real property not having value as an investment. It just meant that speculation – not underlying fundamentals – drove home values between 2006-2008. That “irrational exuberance” caused the housing bubble and bust. Some believe that this type of speculation may be doing the same thing to Bitcoin prices today.

Why is real estate different than Bitcoin?

Today, home prices are being driven by recognized fundamentals; Supply and demand, for example. There is little-to-no speculation in the housing market. Here are the thoughts of two industry experts on the subject.

Bill McBride, Founder of Calculated Risk:

“In 2005, people were just buying homes and letting them sit vacant – and then selling without significant improvements. Classic speculation. And even more dangerous during the bubble was the excessive use of leverage (all those poor-quality loans). Currently lending standards are decent, and loan quality is excellent…I wouldn’t call house prices a bubble – and I don’t expect house prices to decline nationally like during the bust.”

Liu-Down, Genworth Chief Economist

“My thoughts on many recent discussions of ‘housing bubble’ – the bar for a housing bubble is higher than just prices being above some fundamental value. There must be widespread behavior change – as well such as higher levels of speculation.”

Bottom Line

Speculation in any investment is a major element of the bubble formula. Right now, percentages of investors and house-flippers in real estate are not escalated. Therefore, there is not an elevated rate of speculation.