GOLD VERSUS BITCOIN
REVISITING THE DEBATE
Since the 2018 gold vs. Bitcoin (BTC) debate, where Maurice Rosen argued for the outperformance of gold and I argued for the outperformance of BTC, we have over three years of data to compare our respective calls.
Gold increased 41% since March 31, 2018, while BTC gained 487%; the return on BTC outperformed the return on gold by over four times.
I am sure that Maurice would happily point out that BTC was more volatile than gold during this period, so the higher return on BTC came at higher risk. The historic 30-day volatility of gold averaged 1.19% during this period, while the historic 30-day volatility of BTC was 3.7%. Any rational investor would expect a three-time increase in volatility to generate a four-time increase in profit.
BTC’s historical 30-day volatility is low for a financial asset of its nature. The longterm contracting trend in BTC volatility is an overlooked example of the stability and attractiveness of BTC as a financial asset.
BTC destroyed gold during this period in terms of liquidity. The estimated total annual trading volume for gold was $183 billion during 2020, while the total 2020 annual trading volume for BTC was $803 billion. Liquidity for BTC between centralized exchanges, decentralized exchanges, and OTC dwarfed gold liquidity, even if you add up trading in all gold exchanges and gold OTC trading. BTC investors have generated superior volatility-adjusted returns than gold investors while enjoying the benefit of superior liquidity.
The emergence of Decentralized Finance (DEFI) allows crypto holders to generate passive income streams by locking crypto into smart contracts that provide liquidity into decentralized liquidity pools. DEFI is one of the most important innovations in finance and threatens to disrupt all traditional legacy finance and banking structures.
An important innovation is Wrapped BTC, which is created through depositing BTC into a smart contract, which enables the injection of BTC into DEFI platforms or staking pools. Over $14 billion worth of BTC has been “wrapped,” representing 1.3% of BTC outstanding.
I have reviewed staking pools allowing the generation of annualized yields of 1 to 2% on Wrapped BTC. The compounding effect of this yield further strengthens the long-term relative upside for BTC holders compared to gold investors, who need to bear costs of physical storage, ETF management fees (GLD charges 0.4% per annum) or dilution and G&A charged by public gold companies.
Gold increased 41% since March 31, 2018, while Bitcoin (BTC) gained 487%; the return on BTC outperformed the return on gold by over four times.”
The regulatory crackdown on BTC mining in China has strengthened the resiliency of the BTC network by eliminating the potential for Chinese state proxies to use the former dominance of Chinese BTC miners as a vector for attempting a “51% attack” against the BTC network.
My contacts in the BTC mining industry tell me that most BTC nodes are now run on the Tor Browser, an anonymous web browser that protects from tracking and surveillance. The hardening of nodes and further decentralization of hash power have created the most secure network in information technology history.
The onboarding of major companies and financial institutions to BTC and other major cryptocurrencies is bringing an expanding torrent of liquidity into BTC. This is at a time when more BTC is getting locked into smart contracts or lost forever by people who held BTC directly in software wallets and failed to back up private keys. The market capitalization of BTC is now $1 trillion. The market capitalization of all cryptocurrencies is $2.4 trillion.
BTC is quickly catching up with gold’s estimated market capitalization of $11 trillion. Major banks, which used to ignore, deride or even ban cryptocurrency-related payments, are now advising clients on crypto and moving rapidly into BTC and cryptocurrency custodianship.
Ecuador recently legalized BTC as legal tender, giving it equal weight under the
law to USD. With a GDP of $100 billion, Ecuador is an economically significant country. In 2000, Ecuador abandoned its worthless currency and dollarized its economy. According to my source, over 10,000 Ecuadorians per day are onboarding to BTC wallet platforms.
Crypto entrepreneurs have worked with the Ecuadorian government to launch a zero-cost BTC transfer platform built on alternative blockchains. It is now legal in Ecuador to pay any bill, including taxes, in BTC. Other developing countries including Panama and Zimbabwe are reportedly considering adopting BTC as legal tender. The Ecuadorian state is now accumulating BTC as a de facto reserve asset. BTC offers a pathway for developing countries to exit the chains of dollar vassal status and IMF bullying.
The increased use of the SWIFT system as a tool for the enforcement of U.S. foreign policy and extraterritorial law enforcement has incentivized Russia and China to cooperate on the formation and launch an alternative state-sponsored payment system to SWIFT. While certain states with close economic and geopolitical ties to China may ultimately accept an RMB-based currency system, I suspect that additional countries will join the “Bitcoin Block.”
Meta Network’s announcement of the “Metaverse” holds great significance as it reveals the ability to build a “Matrix”-like virtual reality that, according to Matthew Ball, Epyllion CEO, will be worth up to $30 trillion within the next decade. The CEO of Nvidia stated, “The economy of the virtual world will be much, much bigger than the economy of the physical world.”
While Meta Network will inevitably attempt to weave its own planned stablecoin into the underlying fabric of the Metaverse, a material percentage of the value created in the Metaverse will leak into real cryptocurrencies such as BTC. It is hard for me to see any viable role for gold in the virtual world of the Metaverse.
The insane M1 growth in the USA and cumulative impact of “extraordinary monetary policies” has finally unleashed an unstoppable inflationary wave that is driving up the price of food, commodities and manufactured goods. The recent strong performance of gold during a period of technical strength in USD is a bullish sign and reinforces my bullish views on gold and other precious metals, such as platinum.
Now that CNBC personalities are starting to favor BTC over gold, I feel that, over the next three to twelve months, gold will outperform BTC. I have been adding to my position in gold in recent weeks. However, I expect that BTC will outperform gold over the next three years and I plan to maintain exposure to cryptocurrencies, even with the expectation of violent corrections along the way.
If you are not long BTC, you are short BTC.
The regulatory crackdown on BTC mining in China has significantly strengthened the resiliency of the BTC network by eliminating the potential for Chinese state proxies to use the former dominance of Chinese BTC miners as a vector for attempting a ‘51% attack’ against the BTC network.”
Recognizing and deteriming valuation is a result of my training. I can’t apply those same principles to analyzing Bitcoin and its ilk. I consider trading them as short-term speculation.”