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Crypto Crash Highlights Value of Real Assets

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FTX Meltdown

Anyone who’s spoken with me knows I’m a skeptic of cryptocurrency and have been for some time. I’ve been wrong a lot, but I feel a bit vindicated by the story of the last week. FTX, a leading cryptocurrency exchange, filed for bankruptcy, leading to allegations of a Ponzi scheme, fraud by the founder, and misappropriation of client accounts. The more you read, the more unbelievable the story becomes – mysterious co-founders nobody can contact, huge political donations, duped sports celebrities, the CEO on the run from the law. Fair to say we’re all looking forward to the film adaptation by David Fincher as soon as possible.

What does this have to do with us, other than providing entertainment value? For big investors, real estate is one more “alternative” asset – a way of diversifying away from holding too much in cash, bonds, or stocks. Most alternatives are less correlated with the market than traditional investments; after all, there are only so many bottles of pre-war French cognac or 1960s Corvettes (liquor and classic cars are legitimate “alternative asset classes”).
 
The world of alternatives is quite large, encompassing “hard” assets like gold, land, CRE, art, and commodities as well as more abstract options like venture capital, intellectual property rights and cryptocurrency.
 
As FTX demonstrates, the crash is truly epic for more speculative assets – yes, I think it’s fair to say cryptocurrency is speculative, sorry true believers. Crypto does not provide any kind of income. Its value is in appreciation, which is different from stocks (dividends), cash (yield) or real estate (rent).
 
There’s great fear that real estate may lose five or even 10 percent of its value in a recession. Well, there are assets that have lost essentially 100% of their value… in a matter of months. Whatever downside real estate has, and there’s clearly some risk from rising borrowing costs and inflation, it’s hard to imagine the value of RBC Plaza or an Amazon warehouse being zero. Commercial real estate still has fundamentals to support it: rent growth, demographic trends, tax advantages and redevelopment possibility, to name a few. 

Research Weekly Insights FTX Meldown
 

Summary

An offshore Ponzi scheme led to tens of billions of losses for investors, increasing skepticism towards cryptocurrency, and YTD lows for Bitcoin and Ethereum.

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