In many aspects of life, we have a tendency to assume a zero–sum approach to decision-making. What is good for one side is decidedly and proportionately disadvantageous for the other: Heads I win, tails you lose. You are either a dog or cat person, a skier or a snowboarder, prefer the aisle or window seat.
But nothing is one dimensional in today’s complex and multi-faceted investment universe. The vast majority of decisions are actually non-zero-sum, especially if we consider the trillions upon trillions that comprise the global capital markets.
Russell Starr is President, CEO and Director of Trillium Gold Mines Inc., a Director of Canada Nickel Company and a Senior Advisor to DeFi Technologies. He will be speaking at Consensus by Fintech Zoom, our virtual experience May 24-27. Register here.
When it comes to cryptocurrencies and gold, the popular narrative is that the former is stealing the latter’s thunder – crypto’s gains are gold’s losses. Again, the impulse to distill it down to an either/or scenario comes with a very costly lesson, your money. The prudent asset mix considers the maximum return for the lowest level of volatility. As in the case of gold and crypto, each fulfils a complementary function as a repository of value in a global context of uncertainty and looming inflation.
The gold market is estimated at over $11 trillion, which reflects a 2,500-year head start as a globally recognized medium of exchange and value. By contrast, bitcoin has a market cap of about $1 trillion. Even the amount of physical gold held by central banks and investors equates to many times bitcoin’s current market. In 2020, gold’s average daily volume was $125 billion, or roughly 30 times bitcoin’s daily spot volume of some $4 billion. Notwithstanding, both assets have highly liquid markets, meaning there is undeniably ample space for both crypto and gold to flourish.
So, rather than view crypto and gold as competitors, an acceptable analogy might be to consider crypto as the legitimate offspring, or spinoff, with certain common markers. They both have low correlation to other families of assets, and they are inflation–sensitive, great diversifiers and alternatives to fiat issues. Gold is a reliable, age-old secure store of value, and the other a new generation that is growing and evolving, quick to react but lacking the wisdom of longevity.
While investors in the U.S. are jumping onto the crypto bandwagon – which might create the impression that gold is passé – elsewhere in the world, people long accustomed to buying gold are only now open to considering crypto.
Investors should be cautious that investing in crypto at the wrong time can result in rapid and severe losses. Anything that can appreciate unimaginably quickly may be prone to severe corrections. Nothing is guaranteed. While crypto is embraced in North America and some other countries, it is practically banned in China and frowned upon in South Korea.
As a believer in both gold and crypto (particularly DeFi), I can envision gold’s reinstatement in North American portfolios at $2,200 highs. That doesn’t preclude investors from diversifying into other asset classes such as crypto. There are already signs of inflation, much more so than the feds would have you believe, and as governments continue to print money, it will continue its upward trajectory. That means the price of gold, bitcoin, ethereum and critically decentralized finance (DeFi) will all benefit.
The view held by Peter Schiff, a former chief economist and strategist of Euro Pacific Capital, that cryptocurrencies are not money and that investments in them are foolhardy, is flawed in my opinion. Inarguably, the value of anything lies in what one is willing to pay for it. The fate of any currency, digital or otherwise, is in the hands of the financial institutions and credit card companies that actualize its relevance.
As DeFi protocols grow, built off the back of Ethereum and Bitcoin, you simply can’t argue that these digital entities have no value. Crypto’s value, driven by DeFi alone, could make it worth the value of all the traditional financial markets.
The psychology of investing has shown that reasonable and rational behavior almost never coincide. One might think that a bitcoin necklace is worthless, when in reality, it’s not. There are very astute institutional investors and savvy legendary macro investors who believe that crypto is the future because it’s creating a crypto-economy that can run without government–based monopolies that exist now.
Think of it as Facebook 2.0 or Email 2.0 – back in the mid-1990s, email (and certainly Facebook) barely existed. Email was a burgeoning novelty appreciated by few; no one expected to use email as legal tender, or was convinced the internet was safe. Yet look at where we are today. Things change before we know it, which lends credence to the notion that cryptocurrencies and destabilizing DeFi protocols are here to stay.
The benefits of crypto, DeFi and blockchain technology are immense – whether it’s Know Your Client (KYC), the elimination of terrorist financing, or eliminating proceeds of crime – cannot be underestimated. These protocols are significant advantages over gold, which can be made untraceable. Some still think the Nazi gold hordes reside in gold vaults all over the world – no one can argue these are not direct proceeds of terrorism.
If we foresee a place for gold and crypto in the future, over time I expect they will couple and correlate. That’s if the past is any indication. If bitcoin can conceivably reach $80,000–$100,000, and gold $3,500–$5,000 in the near to medium term, people will be likely to invest in both. And the DeFi protocols that grow off the Ethereum/Bitcoin and other blockchains may be worth hundreds of thousands of multiples more.
No, crypto is not likely to replace gold. They are two sides of a coin, the patriarch and progeny, each in a position to benefit from the other’s experience and perspective.