Considering the mania, it is hard to believe Bitcoin was created as an experimental currency and involves the practice of solving math equations to “mine” the asset. Since when does doing algebra instantly create a valuable asset? Further, Bitcoin was never intended to be an investment vehicle and would likely prove to be less valuable than just about any tangible asset on the planet should the world undergo a calamity. In short, its astronomical value is the result of perception not reality. This isn’t a new concept in the financial markets, but we’ve never seen emotions get this out of hand.
Some argue these characteristics are no different than those of gold; that is a reasonably true statement. I’ve always had reservations regarding the practicality of gold being an efficient medium of exchange, but the truth is it has been used by mankind for millennia. More importantly, the gold market is extremely deep. Investors in gold bullion, casual collectors, technology manufacturers, and those valuing its beauty, are all holding a piece of the pie. The Bitcoin market, on the other hand, is believed to be largely owned by roughly 1,000 market participants with uninformed retail traders scrambling to bid up the price of scraps.
Despite the excitement over Bitcoin and the widespread expectations that it is a sufficient replacement for gold, there are some serious consequences of holding Bitcoin relative to gold that the market is not currently accounting for. These security risks might be enough to counterbalance the yearning for massive gains which might never be realized due to challenges in logistics in liquidating cryptocurrency assets in an illiquid environment and a lack of regulatory safeguards. To be clear, we are not fans of big regulation in the financial industry but we’ve been around long enough to know that some common sense regulation is necessary. In our opinion, the lack of governmental control over the brokerages offering cryptocurrencies flings the door wide open to opportunity for fraud.
For instance, one of the appealing aspects of Bitcoin is the fact that it bypasses banks and other financial intermediaries. This introduces a counterparty risk that most other financial transactions and assets aren’t exposed to. There have been a handful of Bitcoin brokers leave the business due to solvency or fraud issues. Those holding Bitcoin at those particular brokerages are simply out of luck. In short, customers who wired funds to such brokers to “invest” (I use that term loosely in this instance) in Bitcoin in hopes of a get rich quick outcome, discovered their funds were used by the brokerage in other way and was gone. Even if their funds did go toward Bitcoin purchases, the assets were liquidated to satisfy priority debt holders of the firm leaving investors with either nothing to show for their efforts or initial principle or in a best-case scenario nickels and dimes on their dollar. Keep in mind, these counterparty risks apply only to those attempting to buy actual Bitcoin via the various brokerages offering the asset, it does not apply to Bitcoin futures contracts. The counterparty risks of Bitcoin do not apply to Bitcoin futures in which all transactions are guaranteed by the exchanges listing them (Chicago Mercantile Exchange and Chicago Board of Options Exchange). Nevertheless, Bitcoin futures are (at least in theory) tied to the underlying Bitcoin price itself, so although the exchange guarantees the futures market transaction itself, there is obviously no guarantee the trade will make money. In other words, the exchange ensures that speculators on both sides of the trade live up to their end of the bargain.
Also, the internet is riddled with stories of Bitcoin holders who have lost access to their Bitcoin assets due to hacked computers, compromised email accounts, or simply losing an associated pin number. Gold and silver bullion investments, on the other hand, are generally sitting in a bank safe with protections most citizens wouldn’t be capable of employing on their own. If the bank is robbed, there is likely some recourse to recoup the value whereas a Bitcoin holder digitally “robbed” of the asset will never be made whole. Accordingly, the new security risks associated with “investing” in cryptocurrency are far greater than most are willing to admit. As flawed as gold is, it has a long history of survival and relevance. That is more than we can say for Bitcoin.
Now that we’ve established that precious meals are a more legitimate asset than the existing cryptocurrencies, let’s peek into what might be in store for both gold and silver as we head into 2018. That said, we hesitate to make any bold calls in such a lengthy time horizon. A year is a long time and the fundamental backdrop can change dramatically. Recall late 2015, the stock market and most commodities were in the dumps but by early 2016 the markets were stable and in some cases roaring higher. In other words, it is important that we avoid getting sucked up into the current narrative and keep our eyes open for shifts in sentiment.
Throughout the latter part of 2017, both gold and silver waffled in price due to a lack of interest. This isn’t surprising, traders are focused on alternative assets such as Bitcoin, the stock market is performing better than nearly all periods in history, and there hasn’t been an immediate need for risk off assets in recent years. Accordingly, precious metals have fallen victim to a lack of attention and trading interest. Nevertheless, sometimes the best opportunities are in those markets the masses aren’t paying attention to. Eventually, the focus will change and investors will look toward the traditional safe-haven assets for a place to diversify. On a side note, I am the first to admit that gold and silver are generally volatile markets with little resemblance of safety but the fact remains that the value of precious metals tends to rise along with uncertainty. Given the stock market’s ability to have avoided a significant correction for over two full years, it seems likely 2018 will bring some sort of equity market pullback leaving investors yearning for alternative assets.
- Source, Kitco News
