Is Bitcoin Fools Gold?
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust."
- Satoshi Nakamoto, creator of Bitcoin
We believe that Bitcoin has hit an inflection point this year that makes it an increasingly attractive speculation as a hedge against continued monetary debasement by central banks. For the past five years Fielder has held gold as a core part of most client portfolios. Looking forward, however, we believe that clients should at least consider whether a small allocation to crypto assets might be an effective complement to gold as an inflation hedge. Below we share our reasoning and encourage any thoughtful or contrary feedback you might have. Fielder’s best resource is our thoughtful clients and friends who help us source and evaluate compelling ideas.
From Grains to Gold to Decree
Money has two primary functions:
1) It is a medium for exchange
2) It is a store of value
Over the course of centuries, buyers and sellers evolved from direct barter to using various mediums of exchange, such as cattle, grain, seashells, salt, alcohol, tea leaves, and as anyone who’s seen a prison movie knows, cigarettes. While these commodities may have worked, to varying degrees, as mediums of exchange, they proved to be lousy stores of value. They were perishable and their supplies could be expanded easily.
No surprise, then, that metals ultimately gained favor as the primary currency in societies around the globe. Compared to perishable commodities, metals were more durable, more supply constrained, more easily divisible, and best of all easier to carry around in your pocket (and easier to conceal from would be thieves).
Among metals, gold ultimately became the most popular currency across centuries and across cultures. For this, we can thank its scarcity. (If you collected all the gold ever mined from the earth, it would not even fill up the Washington Monument.)
Dinosaurs & Money
As the banking industry evolved alongside paper and printing presses, it was only a matter of time before paper money appeared. This paper was originally backed by gold or silver, though we have “evolved” past the need for that backing. Our modern currencies are backed by nothing. Not even a promise. A paper dollar is a unit of exchange for sure. It is only a store of value due to confidence of the public that it will largely retain its buying power.
The point is that money has evolved, just as technology and societies have evolved.
We believe that today’s fiat money will also go the way of the dinosaur. Central banks’ progressively bolder debasement may ultimately reach the tipping point of capitulating public confidence. This concept of tipping point is important. It is why, historically, high inflations have come suddenly and by surprise. All is fine, all is fine, all is fine, and then, “Wow!”
As societies have historically reached such tipping points, they adopt the use of a new “good” money (one they trust) and shun the old “bad” money (Gresham’s Law for the nerds among you).
What would this new “good” money be? It’s a speculation, of course. Several years ago, we would have unequivocally answered that it will likely be a new currency tied to gold. Unfortunately, that currency does not exist today. All developed countries are now on the fiat currency standard.
In the past several years, however, a new “good” money has been gaining currency. In 2008, Bitcoin was an idea. Today Bitcoin is a global currency worth ~$200 billion in aggregate market cap. (Gold, by comparison, has a total market cap of $10 trillion.) A few years ago, as Bitcoin soared to all-time highs, we wrote a note questioning its intrinsic value.* Since that time, Bitcoin’s price has fallen by roughly a quarter, while its probabilities of success have increased. We have seen more signs indicating that Bitcoin’s “brand” as an alternative currency may be reaching a tipping point.
A “good” currency should be scarce, fungible, divisible, durable, and broadly accepted. Bitcoin checks all of these boxes easily with the exception of being broadly accepted. Kinda. About 60 million people have bought Bitcoin. While that would not yet qualify Bitcoin as “broadly accepted”, the trend appears to be heading there. One thing is for sure: Bitcoin is the only digital currency with any significant adoption.**
Most importantly, Bitcoin is decentralized so it cannot be controlled or devalued by one government. It is programmable and might serve other functions to facilitate commerce over time besides just storing value.
The Key Question
We believe today’s global experiment with fiat currencies will end poorly. Temptation has led to debasement. History is full of case studies of currency debasement. They don’t end well.
The question is what alternative currency do we believe the public will most likely deem the best new “good” money? Which has the best odds of being the best alternative store of value and means of transacting?
A modern, digitally connected society is most likely to adopt a modern, digital money. This choice will come bottom-up from the people, rather than top-down from their government. (History shows this repeatedly.) Which would the people choose? Likely one that will have already been widely accepted at the time. Today, Bitcoin is the only digital currency that meets that hurdle. Perhaps another emerges. But the barriers are rising given the natural network effects of currencies.
Some have called Bitcoin a bubble. Robert Shiller has called gold a bubble that has lasted thousands of years. Gold does not have any real industrial uses of size. Money is ultimately what someone is willing to think its worth. The past 50-year experiment with fiat currency proves that.
In the case of Bitcoin, it can easily be worth 0. However, as more and more individuals and institutions adopt it there is a network effect on acceptability.
Given the relatively small total value of Bitcoin vs Gold, and other stores of value, there are many bitcoin bulls that argue for values of 10-100x from here. We don’t have a strong view of an ultimate value. However, as an example, if Bitcoin were to trade at 50% of the value of gold it would have to go up 25x from here.
Here is a sampling of recent signposts illustrating the increased acceptability of Bitcoin:
US banks are now allowed to custody Bitcoin for clients. (Source) This is giving rise to newer, more secure, and more convenient ways to hold crypto assets. This makes it more practical for investors (and their advisers) to choose to invest in Bitcoin. We expect this could lead to a new plateau in demand and drive prices higher.
Switzerland will accept Bitcoin as a form of payment for tax purposes. (Source)
The Norwegian pension ($1 trillion in AUM) recently began investing in Bitcoin. (Source)
Corporations like Microstrategy are holding their cash value in Bitcoin. (Source)
A “Great” Speculation
Legendary investor Paul Tudor Jones recently called Bitcoin a “great speculation” in an interview with CNBC. He’s put almost 2% of his assets invested in it as a hedge against future inflation. “Every day that goes by that Bitcoin survives, the trust in it will go up,” he stressed. This compounding of trust effect is key.
Unlike gold, Bitcoin has not stood the test of time. It is the new brand, just as gold itself was centuries ago. Like any speculation, Bitcoin could ultimately prove worthless. For this reason, it may not be appropriate for every investor. Situations, philosophies, and temperaments vary from client to client. For certain clients, however, Bitcoin may be appropriate as a small allocation to complement their other inflation hedges such as gold. While Bitcoin could be worth zero one day, it may also be worth substantially more if current trends continue.
Fielder has owned gold as a core position for the vast majority of its clients for the past five years. We continue to hold gold today as an alternative currency that we expect will prove immune to long-term inflation. Moving forward, we will also be discussing with clients individually if an allocation to cryptocurrency might be appropriate for their portfolios. Let us know if you’d like to schedule a conversation to discuss this.
Frank Byrd, CFA, CFP® Stephen Korn, CFA
**Ethereum is a distant second in terms of adoption, but we see it as a digital commodity as opposed to a digital currency. Bitcoin is effectively the only digital currency with any significant adoption as of today.
Fielder is an independent, fee-only adviser that provides asset management and family office services.
IMPORTANT DISCLAIMER: This note is for educational purposes only. It is not a recommendation to invest in Bitcoin. Rather, it is to educate investors on why Bitcoin is worth investigating as a potential investment. It is speculative in nature. It may thus be completely unsuitable for some investors. Speak with your financial adviser before investing. Fielder cannot promise any investment result. Every investment strategy has the potential for profit or loss. All investing involves risk including even the complete loss of invested principal.
While the information presented herein is believed to be accurate, Fielder Capital Group LLC (Fielder) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Fielder is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Fielder makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Fielder or its employees may have an economic interest in securities mentioned herein.