I recently had this heated argument with a financial executive on the difference between Bitcoin and gold. He argued that they were pretty much the same thing. Gold’s price has always been whatever people think it was worth. The same with cryptocurrencies.
I retorted that they are not the same. Gold is tangible. You can hold it in your hand. You know how much of it is being stored in vaults. Although the price certainly fluctuates, gold has been a store of value for thousands of years. It doesn’t rust or corrode.
But what exactly is Bitcoin and its thousands of cousins? It’s computer code and exists only in the imagination and in cyberspace. Its price is something borne of pure speculation. If cryptos are a store of value, what are they truly representing?
The reason that I’m so skeptical on Bitcoin’s existential nature is that it’s not really tangible — or backed by earnings, dividends or book value. It’s also a prime target for market manipulators because of this vulnerability.
I’m backed up in my view by a recent paper by John Griffin and Amin Shams of the University of Texas-Austin. They found evidence of Bitcoin and Tether price manipulation last year.
“These patterns cannot be explained by investor demand proxies,” the researchers write, “but are most consistent with the supply-based hypothesis where Tether is used to provide price support and manipulate cryptocurrency prices.”
In other words, speculators were likely behind the huge run-up in cryptos last year, which have been tumbling of late.
Last year, the world was on fire with news of huge gains in cryptos. By the end of 2017, Bitcoin alone rose 1,400%. As of this writing, though, the digital currency is down about 70%. Ethereum and Ripple are down about 20%.
Let’s put this in perspective. Suppose the stock or bond markets had dropped by more than two-thirds. The world as we know it would be awful dark. Fortunately, compared to the debt and equity markets, a relative handful own cryptos.
I’m not saying that some or even many cryptos won’t emerge as alternative forms of capital. It’s already proven that they can perform than function. I’ll even argue that blockchain-based currencies may even change the world of finance, law and even transportation.
But only a truly transparent market of buyers and sellers will make it safe for investors. While regulators ponder how to regulate digital currencies, just keep in mind that only holding a little of these currencies is a good idea for now. That means no more than 10% of your portfolio.