In today’s financial landscape, savvy investors are continually seeking assets that not only withstand the test of time but also thrive amidst economic fluctuations. These are the individuals I love to learn from. I’ve learned through both trial and error an networking groups that two assets that have notably excelled in this regard over the past two decades are levered (using a mortgage instead of paying for it in full) cash-flowing real estate and Bitcoin. Let's dive into why these investments have not only matched but outpaced inflation and monetary debasement.

Levered Cash Flowing Real Estate: A Hedge Against Inflation Levered real estate investments leverage borrowed capital to increase the potential return of an investment. Over the last 20 years, this approach has proven effective for several reasons:

• Income Generation: Real estate inherently provides rental income, which can be adjusted upwards in inflationary times, maintaining or increasing the property's cash flow.

• Value Appreciation: Property values generally increase with inflation. As the cost of construction and property demand rise, so does the value of existing properties.

• Leverage: By using borrowed money, investors can control a larger asset with a relatively small amount of capital. As the property appreciates in value, the return on equity can significantly outpace the rate of inflation, even after accounting for interest on borrowed funds.

Bitcoin: Digital Gold Against Monetary Debasement Bitcoin, introduced in 2009, has been often referred to as 'digital gold' due to its ability to serve as a store of value and hedge against monetary debasement. Here’s why it stands out:

• Limited Supply: Bitcoin has a capped supply of 21 million coins, making it immune to the devaluation effects of supply expansion that plague fiat currencies. This scarcity mimics the supply limitations of precious metals like gold. Our fiat currency can be created in any quantity at any time, putting your purchasing power in jeopardy.

• Decentralization: Unlike fiat currencies, Bitcoin operates on a decentralized network, largely unaffected by the monetary policies of any single government or central bank. This aspect makes it particularly appealing in times of excessive fiat currency printing.

• Adoption and Utility: Over the years, Bitcoin has gained significant traction as a legitimate financial asset, seeing increased adoption by both individual investors and institutions. This broader acceptance has driven its price upward, reflecting its growing demand in the face of limited supply.

Both levered cash flowing real estate and Bitcoin offers unique advantages that not only help preserve capital but also provide opportunities for growth in real terms, outpacing both inflation and monetary debasement.

Let's take a look at a real-life example of leveraged cash flowing real estate in Canada, using a common scenario that might occur in a city like Calgary, Alberta.

Initial Investment and Property Details:

• Property Purchase Price: $400,000

• Down Payment (20%): $80,000

• Mortgage Amount: $320,000

• Interest Rate: 3.5%

• Amortization Period: 25 years

• Monthly Mortgage Payment: Approximately $1,600

Rental Income and Operating Expenses:

• Monthly Rental Income: $2,400

• Property Taxes (monthly): $250

• Insurance (monthly): $100

• Maintenance and Repairs (monthly, estimated): $150

• Property Management (if applicable, 8% of rental income): $176

Monthly Cash Flow Calculation:

• Total Monthly Income: $2,400

• Total Monthly Expenses (including mortgage): $2,276

In this example, the property operates at a slight monthly profit of $124. However, the real benefit of this investment comes from equity build-up through mortgage principal repayment and potential property appreciation.

Equity and Appreciation:

• Annual Mortgage Principal Repaid (first year, approx.): $5,400

• Annual Appreciation (assuming a conservative rate of 3%): $12,000

After one year, even though the monthly cash flow was minimal, the investor gains $5,400 in equity from the principal payments and $12,000 from appreciation, totaling an increase in net worth of $17,400.

Return on Investment (ROI):

• Initial Investment: $80,000

• Return After One Year (Equity + Appreciation): $17,400

• ROI Percentage: (17,400 / 80,000) * 100 = 21.75%

This example shows how leveraging in real estate can be effective even when the monthly cash flow is minimal. The key is in the equity build-up through principal repayment and the appreciation in property value over time. As the property value increases and the mortgage balance decreases, the investor's equity grows, often outpacing the small monthly operating losses. This approach takes patience and an understanding of the market but can be highly rewarding in the long run.

Let's now examine a hypothetical scenario illustrating how Bitcoin has significantly outpaced other investment assets since its inception in terms of return on investment (ROI). For this example, let's consider an initial investment in Bitcoin made in 2010, a year after it was created when the price of one Bitcoin was around $0.08.

Initial Investment Details:

• Investment Date: July 2010

• Purchase Price per Bitcoin: $0.08

• Number of Bitcoins Purchased: 1,250 (investing $100)

Price Evaluation:

• Bitcoin Price in April 2021 (peak): Approximately $63,000

Investment Value at Peak:

• Total Value of Bitcoins: 1,250 Bitcoins * $63,000 = $78,750,000

ROI Calculation:

• Initial Investment: $100

• Return at Peak: $78,750,000

• ROI Percentage: ($78,750,000 - $100) / $100 * 100 = 78,749,900%

This astounding ROI showcases how Bitcoin’s appreciation has been exponential, eclipsing traditional investments like stocks, real estate, or gold over the same period. Here’s a brief breakdown of why Bitcoin achieved such an unparalleled trajectory:

1. Scarcity and Demand: Bitcoin's protocol limits its total supply to 21 million coins, creating scarcity similar to precious metals. As digital currencies gained acceptance and popularity, this scarcity drove significant price increases.

2. Increased Adoption and Institutional Investment: Over the years, Bitcoin transitioned from a niche investment to mainstream acceptance. Major corporations, financial institutions, and even governments have acknowledged or invested in Bitcoin, further legitimizing its use and driving up its price.

3. Market Sentiment and Speculation: The cryptocurrency market is highly influenced by speculative trading and sentiment. Significant media attention and public interest, especially during bull markets, have led to rapid price surges.

4. Decentralization and Resistance to Censorship: As a decentralized currency not controlled by any government or central bank, Bitcoin is attractive in regions with economic instability or high inflation, as it is seen as an alternative store of value.

Despite Bitcoin's significant returns, it's essential to note that it comes with high volatility and risks. The prices have seen dramatic upswings and equally stark downturns. Therefore, while the potential for high returns exists, the risk profile is considerably different from more traditional investments and requires a strong risk tolerance from investors.

Now let’s switch to a more realistic example focusing on how Bitcoin can function as a store of value compared to traditional currencies like the US Dollar (USD) and Canadian Dollar (CAD), especially in the context of inflation and decreasing purchasing power, let’s consider an example using the investment scenario from 2021 and current market conditions.

Investment Details:

• Investment Date: April 2021

• Purchase Price per Bitcoin: $63,000

• Amount Invested: $63,000 (for simplicity, assuming the purchase of 1 Bitcoin). However you can purchase any denomination of a Bitcoin.

• Current Bitcoin Price: $64,000 (April 2024)

USD/CAD Inflation Context: Over the past two years, suppose the average inflation rate in the US was about 5.5% per year, and similar or slightly higher in Canada due to various economic factors. This inflation rate reflects the overall decrease in the purchasing power of both currencies.

Analysis of Bitcoin vs. USD/CAD Purchasing Power:

1. Value of Bitcoin Investment in 2023:

   • Current Value of 1 Bitcoin: $64,000

2. Adjusted Value of USD/CAD:

   • Initial Value: $63,000 in 2021

   • Decreased Value Due to Inflation:

     • After Year 1: $63,000 / (1 + 0.055) ≈ $59 715

     • After Year 2: $60,869 / (1 + 0.055) ≈ $56 601

The adjusted value of $56 601 indicates what $63,000 from 2021 would be worth in 2024, considering a constant inflation rate. This demonstrates a loss in purchasing power due to inflation.

Comparison and Conclusion:

• Bitcoin: Maintained its nominal value rising to $64,000 in 2024 from an initial $63,000 in 2021.

• USD/CAD: Equivalent of $63,000 in 2021 has depreciated to about $56 601 by 2024 due to inflation, reflecting a loss in purchasing power.

Bitcoin as a Store of Value: This example shows that Bitcoin, despite its price volatility, has effectively maintained its value over a two-year period in which traditional currencies have lost purchasing power due to inflation. While the nominal increase in Bitcoin's price is minimal, the real increase is more significant when considering the erosion of fiat currency value. This property makes Bitcoin an appealing option for investors looking to preserve capital over time against inflationary pressures.

This case underscores Bitcoin’s potential role as a "digital gold" — a hedge against inflation and a viable store of value, particularly in environments where traditional currencies are losing purchasing power due to monetary policy or economic conditions. It highlights the importance of viewing investment returns not just in nominal terms, but also in real terms, factoring in the context of currency devaluation.

Bitcoin has truly impacted my life for the better, and yes, I do suffer from confirmation bias. In my role as a personal finance educator, it would be irresponsible of me not to shed light on a highly polarizing topic like bitcoin. However, when it comes to bettering the lives of my audience, I will not shy away from touchy subjects. I took it a step further with increasing awareness, over and above the traditional means of blogs, newsletters and social media. I created a Bitcoin 101: Bitcoin for Beginners Course. This 160 page guide details the History of Modern Money, Understanding Bitcoin, The Bitcoin Ecosystem, How to acquire Bitcoin, How to Use Bitcoin, How to Invest In Bitcoin and Practical Links and resources. You can grab it here.