By David Rosenberg and Ellen Cooper
It has to be stressed that in the midst of the market mania in which we find ourselves, the cult-like fervour behind cryptocurrencies such as bitcoin has become untethered.
Bitcoin has indeed proven itself as a more enduring asset than many had predicted after the first few bubbles burst in 2013 and 2018, and there have been several high-profile institutional investors expressing interest in recent months. But we continue to believe that the comparisons between the digital currency and gold are absurd.
It’s understandable that alternative assets would come into vogue in the current macro environment, where central banks, and the U.S. Federal Reserve in particular, have probed the outer limits of monetary policy and expanded their balance sheets more so than at any other time, including in the aftermath of the Global Financial Crisis.
And with trust in the U.S. government deteriorating at the same time that gobs of stimulus are being released into the economy, investors are wise to be looking for a store of value as a hedge against uncertainty, currency depreciation and inflation risks (though we don’t see meaningful inflation emerging any time soon).
But in our estimation, these are arguments for holding a diversified portfolio that includes hard assets such as gold, things that will keep their value in the face of these ongoing risks. But bitcoin is not guaranteed to hold value.
As we can see from the massive 26 per cent slide on Sunday and Monday (the largest two-day correction since March), even if bitcoin is able to maintain a higher level over time as more investors pile in, the volatility is still too extreme and the value too susceptible to manipulation for it to be a real safe-haven asset. Outside of the Hodl-cult (essentially those who pledge to buy bitcoin and hold indefinitely), many of those who invest in the digital currency do so because of its volatility, which makes it an attractive get-rich-quick scheme for speculators.
Comparisons to gold in this regard are baseless. No one ever talks about the risk that gold could go to zero because it simply can’t — there is a floor in its price, because it has physical properties that make it useful even outside of its primary function as a safe-haven asset. But bitcoin, which has marginal intrinsic value, relies on the faith of its holders that it is worth more than nothing and that the technology is sound.
One of the most oft-cited reasons cited for buying bitcoin is because heavyweight investors, such as Paul Tudor Jones, say on TV that they’re buyers. Sort of reminds me of the E.F. Hutton commercials in the 1970s. Oh, lest we forget, gold, last we saw, is used to conduct the very electricity that bitcoin utilizes in its mining process so intensively (why it is called an “energy hog”). Talk about the anomaly to end all anomalies (not just that anomaly, but consider that most bitcoin investors also tend to be vocal ESG investors … go figure; the bull market is really in hypocrisy).
Don’t get us wrong. As non-crypto-experts, it seems that the electronic ledger system is quite clever as are its built-in features, such as a limited supply at 21 million bitcoins and “halving” events every four years or so (keeping the cryptocurrency’s inflation rate low). The dispersed network also makes it difficult to tamper with the underlying data (though not impossible).
"20% of the existing 18.5 million bitcoins mined to date have been lost by users who forgot passwords or lost their 'cold storage' devices" — NEW YORK TIMES
But there are already issues, including the figure reported by the New York Times just this week that up to 20 per cent of the existing 18.5 million bitcoins mined to date have been lost by users who forgot passwords or lost their “cold storage” devices (i.e., external drives) that held their “assets.” Issues that make traditional banking systems seem much more desirable and secure for the vast majority of people.
Again, though some of the technology behind Bitcoin is possibly revolutionary based on today’s capabilities, that doesn’t mean that innovations in the quantum computing world, for example, couldn’t make bitcoin obsolete. Up-and-coming technological innovations could put the entire cryptosecurity universe in jeopardy as the private keys that are currently thought to be impenetrable might be easily cracked by quantum technology. How useful is it to have a “store of value” that uses technology that could be hacked in a matter of five to 10 years?
Gold has been used as a store of value for thousands of years and is a safe and easily understood asset that has enduring value, whether or not it competes with cryptocurrencies for attention. As technology develops, who is to say that a future technology couldn’t create a “digital gold”?
Without a doubt, digital payment systems will become more mainstream as central banks continue to develop digital currencies, and we have to remain open-minded about how technologies can evolve into the future. But that doesn’t mean bitcoin will reign supreme: just because it was the first, does not mean that it is the best or the last.
Bottom line: we really don’t see the gold-bitcoin debate as being “one or the other.” There is nothing wrong with investing a small, and we mean small, share of your portfolio in something such as bitcoin, if your risk tolerance allows it (or you just want to go along for the ride). But as prudent investors, we maintain a healthy dose of skepticism about it as a store of value since its bubble-like price action speaks more to a risk-on quality than a hedge against uncertainty.
Look at its price performance: 5x the volatility in gold. It’s like comparing consumer staples stocks to semiconductors. Just because it has emerged as a means of payment, doesn’t mean bitcoin fits the requirement of being an investment. After all, whoever says, “I want to carve out part of my asset mix in Swiss francs.” But why not Swiss francs? The historically disciplined Swiss National Bank has been holding Swiss M2 growth in a tight and consistent annualized growth range of three to five per cent over the past five, 10, 20 and 30 years.