Loyalists to cryptos buy Bitcoin, Ethereum and other cryptocurrencies as a way to give the middle finger to central bankers; whereas gold bugs buy the precious metal because they’ve given up on central bankers…
Cryptos are a ‘protest investment’ while gold is a safe haven investment. Two different plays, both of which are benefiting from the geopolitical uncertainty as well as the aggressive correction in the USD. But before going any further, let me ask a pertinent question:
If a currency crisis were to take hold tomorrow (a scenario in which the USD collapsed in value very quickly), what would you want to own – Gold or a cryptocurrency?
One more:
What’s more durable – a mineral or a digital currency?
Is Bitcoin Slowing Gold’s Rise?
Gold is up roughly 14% year-to-date – pretty stellar when compared to other major asset classes. The Dow Jones, for example, is having a historically strong year, up roughly 11% YTD.
Despite the precious metal’s strong year thus far, many of the biggest financial publications are publishing op-ed pieces about how gold is drastically underperforming cryptocurrencies, namely Bitcoin and Ethereum. It’s as if the financial media has a bias against gold… Nah, that couldn’t be. I digress.
Some recent headlines from major publications…
Crypto exec says bitcoin is in a bubble — but it could still hit $5 trillion market cap
Why The Cryptocurrency Market Has Reached A New Record High
Hedge funds are rushing into cryptocurrencies to juice their weak returns
At the time of writing, the two aforementioned cryptos had roughly an $80 billion and $35 billion market cap respectively ($115 billion combined). Compare that to the combined market caps of the world’s five largest publicly traded gold miners:
- Barrick – $20.77 billion
- Newmont Mining – $19.3 billion
- Goldcorp – $11.72 billion
- Kinross – $5.5 billion
- AngloGold Ashanti – $4 billion
*All figures are in USD and are approximations
Shocking, isn’t it?
Cryptocurrencies Stealing Liquidity from Gold? Noway
The combined market cap of the top five gold producers in the world is about $61.3 billion…
I’m not implying these gold producers should have drastically higher market caps; after all, their stock prices are based on typical earnings ratios for a company in a volatile industry such as mining. What I am trying to highlight, however, are two things:
First, cryptocurrencies have the word ‘currency’ associated with them. That in itself will create a much broader participant arena of speculators, funds and retail investors than a gold company which trades on three or four stock exchanges. The FX market, after all, is the biggest marketplace in the world. It is understandable that impressive liquidity, and extreme price surges like we’ve seen in cryptos recently, take place in economic and political climates such as today’s.
Second, the ‘financial establishment’ (Wall Street bankers, funds, governments, central banks, etc.) turned their collective backs on gold decades ago. It has no geopolitical support, at least not in the Western world. In a global economy that has never been more manipulated and influenced by geopolitics and central bankers, it’s understandable financial media outlets (often propaganda conduits for governments) are reporting gold as such an underperformer despite leading most asset classes in 2017.
The argument made by these financial journalists is that cryptocurrencies are stealing interest from gold (painting gold as an antiquated safe haven), and that is why the yellow metal isn’t performing well. A silly argument. Gold is up 14% YTD when inflation is running at an annualized clip of barely 1.5%. It’s beating nearly every major asset class there is in 2017.
While cryptocurrency advocates and gold bugs most certainly share a distrust in centralized fiat currencies, they are largely, not without some crossover, of course, attracting different buyers.
The Attraction to Cryptocurrencies
Cryptos are fun. Because of their parabolic rises this year and growing positive media coverage, the gamblers have shown up in their marketplaces. Casinos are always enticing.
Cryptos are also hip, and that’s what continues to draw in Millenials as it appeals to their quasi-libertarian beliefs.
Furthermore, cryptocurrencies are surging because they’re in their infancy (less than a decade old – compare that to gold, the oldest currency on the planet); and they’ve caught the eye of the Chinese and Millennials – the West’s largest demographic and the world’s most populous nation.
The Hardcores, Speculators, and Optimists
Hardcore buyers of cryptos, just like gold bugs with gold, believe that one day they will own the world’s dominant currency. Please revert to the question I asked near the beginning of this article 🙂
There are also those opportunists in the gambler’s craze. We see similar, albeit on a smaller scale, trends on the TSX Venture. A new, hot stock all of a sudden is the talk of the exchange, and everyone jumps on board hoping the run will continue and they can inevitably sell before the correction. Eventually, in every parabolic rise, there comes a period where the majority of a day’s or week’s buyers don’t really know what they’re buying… it has happened throughout history, and that’s what we see with cryptos.
Hedge Funds Jumping Into Cryptocurrencies
What’s indicating this speculative trend will likely continue for several months are all the hedge funds participating in the crypto and blockchain marketplaces. I view this as a bellwether for us Venture investors…
If you think this cryptocurrency frenzy isn’t going to fall on our front door (the Canadian small and micro cap markets), think again. This summer I’ve been approached to invest in not one but three hopeful blockchain related deals with near-term IPO aspirations. Once the funds buy into a sector, the deal flow always follows. Opportunists and innovators start projects which can be funded. Case in point: new weed stocks last year – 50% of which likely won’t exist in three years.
That said, I do believe some form of cryptocurrency will survive over the long-term. I believe the big banks will take over the crypto market as they always have with currency. In fact, it’s already beginning. From J.P. Morgan to MasterCard and many other financial institutions, they are investing in, and filing patents for, crypto-related technologies. Once that happens more frequently, the term ‘crypto’ will be merely window dressing; and the new, big bank version of cryptocurrency won’t resemble anything close to what we see today with Bitcoin and Ethereum. Until then, it’s a speculators paradise, and the financial media is a pumping accomplice.
Recognize that cryptocurrencies’ epic run in 2017 isn’t stealing any luster from gold. That’s a scarcity belief – such that one can not benefit without another losing. Gold is a tried and tested asset with a demographic of buyers that hasn’t changed in hundreds of years. Cryptos are new and sexy; and those having a lust for investment sex appeal are betting big. Millennials are not buyers of gold – they have never been, but they love blockchain.
In touch,
Aaron
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