Given the incredible rally in the price of Bitcoin (BTC), and other crypto-currencies like Etherium this year, there has been no shortage of interest in this space, with precious metal investors asking whether or not BTC is basically a digital version of gold and silver or not.
This is a subject I've written about for some time, including in the 2016 book Gold for Australian Investors, where an entire chapter is devoted to the subject.
I'll expand on the chapter from the book, focusing on what I believe is the key mistake proponents of BTC make when forecasting ever higher prices for crypto-currencies. And that mistake, if we can draw a hopefully useful analogy, is that they are mistaking the pipeline for the oil.
After all, when you stop to think about it, the way in which we transport oil has come a long way in the last century or so. It has essentially moved from:
- Horse, cart and wagons, flatboats, barges and the railroad; to
- Tanker trucks. In the 1940’s these were all the rage, with the trucks originally having 40 to 50 barrel capacity, though they soon were built to hold +200 barrels in terms of capacity: to
- Pipelines for transport over land, with oil tankers the primary means of moving oil across the oceans.
You can read more about the history of oil transportation here.
As you can see, the process of moving oil from point A (production) to point B (refineries) to point C (end consumers) is now completely different, and not to mention unrecognisably more efficient compared to 100 plus years ago.
Billions of dollars of capital expenditure have been invested in this process, which is ongoing. But at the end of the day, its still oil that is being moved from point A to point B to point C.
Our current banking system is the same. After all, when you think about it, credit cars are infinitely more efficient as a form of money transfer compared to a bank cheque. Paypass is more efficient still. But at the end of the day, the actual money itself that is transferred using these mediums remains the same.
You can see where we are going here when it comes to BTC , and why we think its proponents are mistaking what is truly a breathtaking technological development (the blockchain), with a supposedly superior form of money itself.
The video presentation in this article from a 2013 conference titled “Why you should invest in Bitcoin”, with a focus on Bitcoin being “The Future of Payments” is an example of this.
In fairness to the presenter (much of the content is very good), he was talking up BTC’s prospects when it was a lot cheaper than it is now, so anyone who bought it after listening to his talk is no doubt a happy camper.
He did also only suggest investors allocate a very modest portion of their portfolio to BTC.
But the question again needs to be asked – is it a pipeline, or is it oil. The way I see it, the argument that one should invest in BTC because it's the future of payments is analogous to saying you should invest in pipelines because they’ll replace oil.
Recently, the same presenter from that video created the chart shown, highlighting the potential value of one bitcoin based on certain parameters.
Needless to say, I am skeptical.
Proponents of BTC and crypto-currencies in general also have to deal with the fact that the number of competing crypto-currencies in existence continues to explode, as per the chart below from the Macro-Tourist Blog.
As per the chart shown Crypto Currency Universe, there are now over 800 competitors to BTC in the crypto-currency space. Collectively, their market capitalization is pushing USD $80bn.
To be fair, some would argue that USD $80bn is not that large, given Apple could buy the whole lot with their cash pile, as well as all the major gold miners on the planet.
It also needs to be pointed out there are also circa 200 FIAT currencies competing with BTC and the 800 odd crypto-currencies.
Meanwhile, there is still just one physical gold!
My thoughts on BTC can thus be summarised in the bullet points below.
- BTC is definitely not gold 2.0 or digital gold, but more and more people are questioning what money is today, and will continue to do so
- This is no surprise given the extreme monetary policy decisions taken by central banks in the aftermath of the GFC, including but not limited to QE and ZIRP, which continue to this day
- Many people questioning what money is today are naturally turning to physical gold and silver, whilst some are turning to BTC, with some cross-over between the two
- This is not surprising as gold’s unique monetary qualities are not widely understood, hence people get excited about BTC thinking its digital gold, or gold 2.0, as it’s often been cleverly marketed as
- I am a big believer in blockchain technology, and was thrilled to see the developments recently announced by Calastone, who are testing out a blockchain for settling and trading managed funds. But as discussed, this makes blockchain a more efficient pipeline, it doesn’t make it oil
- As such, I think BTC and other crypto-currencies monetary status will prove ephemeral over long term
- In the meantime some speculators will make a killing in BTC and other crypto-currencies, but the vast majority will lose money, and potentially quite a lot at that
- Investors who are primarily focused on wealth preservation through the most difficult market, monetary and macro-economic environment we will ever see should not steer away from physical gold and silver as their primary savings assets