Inflation fear is increasing among many investors. Many trillions of US dollars and euros will flow into the markets in the next few months. But which asset class is best suited to protect yourself against inflation?
Even if the extent of the corona pandemic is still unclear, we already know today that the global economy will fall into a recession. This crash has ramifications for all asset classes. Inflation as a reaction from central banks is becoming increasingly likely. In the sales panic in mid-March, all assets, including gold, plummeted. Even after the panic, the question arises as to where to invest your saved money and where necessary to switch. The asset class that reacted the least was – unsurprisingly, the real estate industry.
When illiquidity doesn’t just have disadvantages
When it comes to panic selling, Bitcoin is a bad asset for those who are slow to react. No matter when the shock hits the exchanges, cryptocurrencies are traded 24/7 and can be liquidated immediately. When in doubt, cryptocurrencies are therefore the first asset to be sold, ergo, before any other asset class. The high liquidity and fungibility of Bitcoin can prove to be a disadvantage in such situations.
Real estate, on the other hand, reacts to economic crises with a significant time lag. So it will only be possible to say in a few weeks whether there will be a real estate crisis in the coming economic crisis. Of course, this does not apply to the 2008 crisis, in which real estate or bad real estate loans triggered the financial crisis.
Real estate: The two sides of the coin
While with Bitcoin and gold the buying arguments after the selling panic are obvious – scarce supply in contrast to the flood of money from the central banks – this is not so easy to answer for real estate.
On the one hand, real property as real assets offers relatively good protection against inflation. In any case, the expansion of the money supply in recent years has led to sharply rising purchase prices for real estate. So far, real estate has worked out for investors as inflation compensation. However, this argument also applies to stocks that rose between the last financial crisis and the current one primarily due to the expansion of the money supply and not due to productivity gains.
Crisis dries up the credit market
On the other hand, the credit market dries up in a crisis. People can no longer pay their rents, construction projects are no longer financed and a missing buyer side can quickly lead to a negative price spiral. Many are likely to still see the pictures from 2008, in which people had to leave their expensive financed real estate. However, there were often no buyers or only very low prices. The supposedly safe investment property has become an absolute nightmare for many people.
Real estate funds also came under massive pressure, so that not only the physical owners, but also “real estate brokers ” suffered large losses. You do not have these risks when investing in Bitcoin or gold, even though credit risks can, of course, arise with a leveraged investment.
Protection against inflation: The great role model of gold
While gold has been considered inflation protection No. 1 for centuries, the same can be said of digital gold (Bitcoin) only to a limited extent. After all, the phenomenon of Bitcoin is still too young to rely on historical data that makes it possible to make reliable statements.
Things look different with real estate. Although these emerged as winners from periods of higher inflation, there was often an additional tax afterward, which severely reduced inflation gains. In the great German inflation of the last century, an enormous financial burden for supposed inflation winners was waived with the house tax and the equalization law.
The examples show that in the case of moderate inflation, real estate is well suited to protect against inflation, whereas in the case of hyperinflation, the likelihood is very high that the state will tax real estate assets through extra levies. It is only known in retrospect whether a property investment was still worthwhile.
Does inflation lead to a Bitcoin ban?
In gold, too, state intervention in the form of gold bans has occurred repeatedly in economic history. In the past century, gold was banned for a long time in both Germany and the USA. It is unlikely that such extreme scenarios will occur again in the future. However, gentler cuts are conceivable. These can already be seen when buying gold, which can only be done anonymously to a limited extent. As part of the 4th EU Money Laundering Directive, which entered into force on January 1, 2020, the amount at which gold can be purchased anonymously has been reduced from the previous EUR 10,000 to EUR 2,000.
And what about bitcoin? As already mentioned, there is a lack of experience with how Bitcoin behaves in different phases of the crisis. Since the birth of Bitcoin, the global economy has finally been in a rally. The corona crisis is the first global economic crisis in which Bitcoin has to prove itself. The chances are that the states will bite their teeth at Bitcoin and keep their hands off it. Finally, there are no access options. Bitcoin cannot be physically seized, and capturing it in the context of a special tax is more than complicated. If necessary, there may be individual states that will try to enforce such bans and conditions. However, the chances are not high that this will work.
Not whether, but when
Every investor should own real estate, gold and stocks as well as Bitcoin. However, it should not be forgotten that in an economic crisis and after hyperinflation, special levies were the rule and not the exception. Even if Bitcoin, unlike gold, has to prove itself to protect against inflation, it can score a maximum in return in the investors’ portfolio.
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