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Bitcoin vs Gold: what is the better inflation hedge? In case you hadn’t heard, Australian investors have become excited about the future of Bitcoin and other cryptocurrencies. That’s why, when the BetaShares Crypto Innovators ETF (ASX: CRYP) was launched on Thursday 4 November 2021, demand for shares in this ETF was hot.
When you buy this ETF, you don’t get Bitcoin or any of the other cryptocurrencies directly. What you get is a fund that seeks to track the Bitwise Crypto Industry Innovators 30 Index. That, in turn, is an Index of US companies that are major players in the emerging crypto field. It includes companies like Coinbase (Nasdaq: COIN), a crypto exchange; Silvergate Capital (NYSE: SIL), which banks the crypto exchanges; and Riot Blockchain, (Nasdaq: RIOT), which mines Bitcoin.
The smart money first moved into Crypto in 2012
If you want some background reading as to how we got to the Cryptocurrency Boom of 2021, we recommend two great books: The first one, Nathaniel Popper’s Digital Gold: The Untold Story of Bitcoin, is so good it was shortlisted in 2015 for Financial Times and McKinsey Business Book of the Year Award. The second book is Bitcoin Billionaires: A True Story of Genius, Betrayal and Redemption by Ben Mezrich.
Digital Gold looks into the origins of Bitcoin and how it quickly evolved from the Satoshi era when that enigmatic, mysterious figure with the Japanese name published what came to be known as the Bitcoin White Paper in 2008.
The second looks at how the Winklevoss twins – the guys who almost created Facebook – were early investors in Bitcoin and were instrumental in helping it to mainstream away from the era when it was just libertarians and criminals that cared about it. Read through those books and you’ll see smart money moved into crypto around 2012. That’s nine years ago now.
Is crypto just another bubble?
Frankly, we at Stocks Down Under have been amazed by the enthusiasm with which investors have greeted cryptocurrencies in 2021. It reminds us very much of the last time investors really got excited about a revolution in the global economy. It was called the Dot.Com boom of 1999. That was the time when people first got really excited about the commercial future of the Internet. Any listed company with dot.com somewhere in its business plan was bid up to what subsequently looked like a bubble. The Dot.Com boom was short lived, flaming out around March 2000. And when you looked back it all looked a little ridiculous.
The crypto use cases are very real
What’s similar about the Cryptocurrency Boom and Dot.Com is that both had implications for the future of the global economy. The technological underpinnings of Dot.Com were real. Which is to say, after the bubble burst, the real online economy would continue to grow and transform just about everything we do everywhere in the world. In retrospect, it’s clear that the Dot.Com investors were right, just a decade too early.
We believe the same might be true of crypto. One of these days the US dollar as a genuine reserve currency may be history and most fiat currencies will be in no fit state to step up to the plate. But that day is still coming and, in the meantime, policy makers still have options about how to regain some measure of control over the world’s monetary systems. If some of them start to work…well, maybe it’ll be March 2000 all over again. After that, we predict that it won’t be crypto that will transform our economic lives – it will be blockchain, the technology behind the cryptos.
A blockchain is a digital, distributed transaction ledger with identical copies maintained on each of the network’s members’ computers. It’s what built transparency and fairness into the system to make Bitcoin a reality. But it also made a whole lot of potentially more important stuff possible. Like the secure sharing of medical data, supply chain and logistics monitoring, voting mechanisms, real estate processing. You name it, it works better with blockchain.
Faites vos jeux
That’s why the bet that Marc Kennis and Stuart Roberts currently have open is so interesting. Stuart has a bad habit of losing bets to Marc (and then welching on the forfeit for as long as he can).
In early 2019 Stuart bet that the Australian economy would get to mid-2020 and still be growing. He lost, thanks to a novel virus no one saw coming. Then in late 2020 he bet that Trump would win the US Presidential election of that year. Again, he lost (narrowly, it must be admitted). The latest bet, established earlier this year, is the most interesting of all. It’s about where Bitcoin goes to. If it hits US$200,000 before it hits US$10,000 again, Marc wins….again! With this one there’s no time limit.
The Blockchain may be safe, but exchanges traditionally haven’t been
Why this divergence of views on crypto? Not because Stuart is a luddite. Far from it. In fact, Australia’s leading biotechnology analyst is very much a technophile. He argues, however, that crypto is still such a Wild West field that it’s a matter of when, not if, some major hacking or regulatory event plays havoc with the markets and sends Bitcoin down. Mt. Gox, Poly Network, Bitconnect…. It seems these are not one-off events. When the Next Big Hack happens, or the Great Outlawing happens, it’s reasonable to expect all the folks who can’t tell Dogecoin from Polkadot will riot their way to the exits.
It’s not that blockchain technology isn’t safe. Indeed, the distributed nature of the ledger makes it safer than Fort Knox. It’s the exchanges. If you read Popper’s book, there’s a horror story in there worthy of a Stephen King novel about the failure of Mt. Gox. That failure would be great if it were the only one. But they’ve come one after the other in the years since, resulting in substantial losses that have undermined confidence.
That said, we think things have improved in the last couple of years as the ‘immune system’ of the crypto world has been strengthened by those previous infections. If it were as hackable as Mt. Gox, the CBA wouldn’t have recently gotten into the game. Just this week that bank announced that it will become Australia’s first bank to offer customers the ability to buy, sell and hold crypto assets via the CommBank app. They would have asked the Reserve Bank first.
Bitcoin vs gold in times of inflation
So, Bitcoin vs Gold: which is the better inflation hedge? Stuart’s enthusiasm is for gold, which we’re calling the world’s Original Crypto, tried and trusted since about 10,000 BC. And now headed for US$10,000 an ounce, or at least that’s what we think. Stuart also likes to remind people who know their Bibles that Heaven is paved with gold, not Bitcoin. Gold has traditionally been the hedge against inflation everyone instinctively turned to, as Roy Jastram famously showed in his 1977 classic The Golden Constant.
For Marc, the other side of that bet is simple. Stuart may be a great equities analyst, but he always loses his bets. So don’t look a gift horse in the mouth. More seriously, while Marc concedes gold is likely headed up – indeed, maybe a considerable way up from here – he argues that gold is for older folks who can remember what the world was like when Jimmy Carter was US President and for arch-conservatives like his business partner. For everyone else, the ease with which you can get set in crypto beats gold ETFs any day of the week, he would say. In fact, Marc believes that crypto has to some extent taken over from gold as an inflation hedge, to the point where maybe, in the not-too-distant future, we’ll see some nations adopting a crypto standard for their legal tender currency.
Makes sense, don’t you think? Thanks to Satoshi, there’ll only ever be 21 million Bitcoins in circulation. Whereas gold, while it’s scarce, can be added to every time a new gold mine opens in the Western Australian desert.
So, Bitcoin vs Gold … the jury is still out. Time will tell if Marc wins this bet, but he’s quietly confident. So is Stuart.
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