Midas versus Satoshi…
Two things I love: cryptic titles and submissions to the blog. Here’s another email I received:
“What are your thoughts on cryptocurrency and precious metals?”
I’d say you just handed me a can of worms, but this is more like a barrel of worms. I’m going to pry it open anyway. Sticking with the worm theme, there’s a lot to be “dug up” here and I could easily write a few articles on both subjects. However, I’m going to do my best to condense it because I want anyone who sends something to the blog to get a nice concise response in a single post. Let’s get started!
First, crypto. The rollercoaster. The new kid on the block. Even though it was invented in 2009, the first and most famous version of crypto (Bitcoin) didn’t gain popularity until 2018, and even then it was only a blip on the radar of the financial markets. Fast forward to Covid-19. Shutting down an economy doesn’t exactly help businesses function (understatement of the year), so stock prices sunk, and people started freaking out. People wanted their money to be in anything that didn’t reflect the market indexes, so crypto hit the big red “blast off” button.
What do I think about it? Well, as an investment advisor I definitely have curiosity and reservations. This is a new technology, and that means there are a lot of unknowns and bugs to be worked out. However, it is becoming more accepted and recognized, the first Bitcoin ETF recently being approved by the SEC on January 10 of this year. Here are just a few of the things I see:
There is no underlying asset. It sounds confusing but I promise it’s not. When you buy stock, you actually own part of a company. If that company performs well, then you are entitled to your percentage of the profits. However, if you buy crypto, there’s nothing physical or material behind it. Most of what determines the value is what other people think it’s worth! Supply and demand.
Low liquidity (difficult to sell or convert to cash) due to skepticism.
High volatility, the price movements are unpredictable and drastic. It’s a high risk, high reward, high stakes game of poker and guesswork.
Scams. It’s a digital asset and therefore a hacker’s dream come true.
40,000% growth since 2013, an annualized return of 110%, absolutely nuts.
This is a wild tiger that a tourist found and brought home. Yeah, he owns a tiger, but yeah, it might kill him.
Now, precious metals. The old guy. Steady Eddie. They need no introduction. In many ways the polar opposite of crypto, precious metals also have traits that are eerily similar. For the record, there are many precious metals with slightly different characteristics, I’ve decided to reduce this specific conversation to gold.
There’s this widespread rumor that gold is the safest, most reliable asset (unlike crypto). I hear constant banter about the “gold standard” and how it’s what the world will inevitably return to should the global economy fall apart. You hear a new radio commercial for gold IRAs every day. Why? What is going on!?
Gold does have an underlying asset: literally gold bars. However, a gold bar doesn’t fix your sewer and earn money. In fact, it needs to be stored and protected from theft, which actually costs money. As a result, price increases also stem largely from demand for gold, not from earnings or price increases.
If I own gold, I want everybody else to buy gold. This will reduce the supply of gold (a limited resource) and cause my gold to gain value. I would benefit greatly by going on the radio and telling everybody how good gold is, and how important it is for “safety”.
Gold is relatively stable, and often performs better when stocks are declining. That means it can be used as a tool for diversifying your portfolio. It doesn’t necessarily mean that it’s the best tool to accomplish that.
Gold is highly liquid (not the state of matter). This makes sense because everyone understands that gold has value.
Since 2013 gold has increased 30.25%, an annual return of 2.43%. For reference, inflation has also eroded that value by 2.62% per year. . .
So, I realize that you asked for my thoughts, and I mostly gave you the facts. However, my thoughts and opinions definitely peek through in which facts I presented and how I presented them. Understand that nothing I’ve written here should be used as advice or be seen as a call to action. Both asset classes presented here are highly emotional: people largely trade based on fear, greed, how they feel, and their economic/political outlook. Unfortunately, emotions are often the demise of the investor. Make sure that before you invest in something you understand what it is, how it works, and your reasons/motivations for choosing that investment in the first place.
There you go.
Unsatisfied? Not simplified enough? Oversimplified?
brett@centennialsec.com or use the “Contact” tab above.
