Many of the great traders in history have made their fortunes by buying unloved or out-of-favor assets, being patient, and taking profits during the eventual mania phases.
Precious metals are currently in that “unloved” category while Bitcoin is in its mania phase.
Carley Garner has written an excellent research piece on the outlook for gold and silver for Kitco’s 2018 Outlook Series. It is balanced and free of hype. Excerpt is below.
Bitcoin has dominated the financial news cycle, but in the long run, this particular cryptocurrency might be more bark than bite. Although the technology of blockchain and cryptocurrencies will live on, the way the financial markets have pinpointed Bitcoin as the end-all-be-all for the complex is arguably flawed logic. The cryptocurrency idea is less than a decade old and will undoubtedly experience growing pains. Many believe Bitcoin is the start of a new era capable of changing society in a manner similar to the internet. How soon we have forgotten the struggles of technology pioneers. Remember Pets.com?
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.
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