Why Farmland Might Be Bigger Than Crypto
As the COVID-19 pandemic looms large and economic uncertainty prevails, investors continue to seek opportunities to exit conventional markets for upside in the alternative space. Bitcoin, in particular, has become a go-to option for many investors.
However, even if crypto proves to be a solid investment when stock markets are rocky, there’s a world of difference between real assets and crypto. Real assets, such as gold or real estate, have intrinsic value that crypto can’t match. Bitcoin may nab more headlines but might not offer the kind of inflation and recession hedge that real assets can.
Farmland is a Proven Investment Option
Few investment opportunities can rival farmland’s historical performance. Farmland has provided investors with a positive return every year since 1990. Better still, the average farmland return during this period was 11 percent, which outperformed percentage gains from the S&P 500 and the Dow Jones Industrial Average several times in that span.
Farmland is synonymous with inflation-resistant investing. It enjoys a low correlation with the stock market and increases in value when the CPI increases. With inflation hitting a 39-year high, this asset shouldn’t be overlooked. Plus, agriculture has a built-in demand that is going to increase by anywhere from 59% to 98% by 2050, making farmland even more valuable over time - an idea Mark Twain famously predicted when he said, “Buy land, they aren’t making it anymore.”
Unlike cryptocurrency, farmland investing has been around for ages. Modern farmland investing in the United States began in the 1980s and has done a remarkable job of retaining value ever since. As a result, farmland has long been a known entity for investors like Bill Gates who want a steadily appreciating alternative asset in their portfolio. Bitcoin might be getting plenty of attention for its appreciation over time, but it has a much shorter track record than farmland.
Real Assets Historically Dominate in the Face of Volatility
Bitcoin has, in its brief history, enjoyed little correlation to conventional markets. This has led many investors to invest in Bitcoin as a safe harbor asset, rather than for its intended use as currency. Some have even compared it to gold. But cryptocurrency isn’t entirely immune from market swings. Nor is it a true replacement for gold. Additionally, it's important to note that crypto's correlation tends to increase during times of broader risk-off sentiment, which has been observed in recent months.
Comparatively to gold, Bitcoin’s value dropped by 50 percent in a single day back in March of 2020 as the pandemic unfolded and markets tanked. Gold prices only dropped by 4 percent. Bitcoin prices have since rebounded, but volatility persists. When the White House revealed potential changes to the U.S. tax code last April, for example, it sent Bitcoin into a sell-off that saw the cryptocurrency shed more than $200 billion in value.
Although crypto is often considered as an alternative to gold, gold, again, only dropped by 4 percent during the same period.
Source: Yahoo! Finance, Bullion By Post
Bitcoin and other blockchain-based currencies may offer an outsized return for market-wary investors, but this prospect still comes at the expense of stability.
Investors who want to find a low-correlation investment should still look toward real assets if protecting value is paramount. After all, real assets have intrinsic value by way of being tangible and useful in practical applications. Crypto, on the other hand, does not. Even if crypto proves to be a solid investment for when markets are rocky, it won’t be a perfect substitute for real assets.
Farmland has Built-In Demand
One of the biggest challenges with cryptocurrency is reliable demand. Right now, Bitcoin and others derive their value from their use in transactions as well as overall scarcity. That, and investor interest.
As Warren Buffett once put it, “Cryptocurrencies basically have no value and they don't produce anything. They don't reproduce, they can't mail you a check, they can't do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person's got the problem.”
The point Buffett makes here is a salient one. Some of the best investment opportunities are those that have demonstrated demand. If that demand is coupled with a real market need, as farmland provides, then investors should have much more confidence in their decision to invest. Cryptocurrency relies wholly on artificial scarcity and investor interest, leaving it on inherently shakier ground than farmland.
Despite the unparalleled built-in demand associated with real assets, there are Bitcoin and crypto bulls, such as billionaire Paul Tudor Jones, who remain optimistic about their preference for crypto. Additionally, this past October El Salvador became the first country to adopt Bitcoin as a legal tender.
Farmland Works with Your Retirement Accounts
Investing in cryptocurrency has gotten significantly easier in recent years. Despite crypto exchanges gaining mainstream attention (and, in the case of Coinbase, even enjoying an IPO), there are still only so many ways to invest. One glaring issue with crypto markets is how difficult it is to include within a retirement account.
At present, most retirement savers who want to include crypto investments into their portfolios have to do so with their own post-tax dollars. Investors can choose to set up a Crypto IRA via a Self-Directed IRA, but providers are limited and so too are the kinds of crypto you can hold within your account. This may leave investors with difficult tax implications in both the long- and short-term as they have to pay income tax on the money used to buy cryptocurrency, and then have to pay capital gains taxes when they withdraw these holdings.
Conventional investments don’t suffer from this challenge, and neither do many alternative investments, such as farmland; in fact, you can invest in farmland through your IRA funds.
While Crypto Jumps, Farmland Climbs
It’s tempting for the average investor to look into the next big investment opportunity, even if there can be significant risks involved when buying in. This is true for cryptocurrency. There are still many unknowns for investors that want to hop on the blockchain: namely, there’s no way to know if crypto really is here to stay.
Bitcoin and other cryptocurrencies represent a major disruption in the way we perceive value, and how decentralized entities can function in ways once left to central reserves. That doesn’t mean they’re necessarily right for your average investor. Investors hunting for something new and exciting can still enjoy the security of a time-tested asset.
This is where farmland investing has—and will continue—to stand out as a stable, valuable, and historically in-demand asset. The need for sustainable agriculture will skyrocket in the decades to come, and the amount of farmland around the world isn’t necessarily increasing to meet demand. That makes existing farmland all the more valuable.
Interested in learning more about farmland as an asset class? Click here to read our FAQ or get started by visiting ways to invest.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.