Let’s agree on one thing. Both gold and bitcoin are totally worthless. And before any gold bug chimes in with “what about..” Let me stop you cold. Gold is the only commodity that produces 100 times annual supply to actual demand. Yes all that jewelry and industrial use is  just one tiny percent of annual supply. Imagine if that was the case with oil or soybeans or coffee or any other commodity that humanity actually uses and you can imagine what their price would be in such a scenario.

  • Money is Nothing but a Cultural Construct
  • Bitcoin is a Better Store of Value
  • Volatility Ride of a Lifetime
  • “Soft” Regulation is Coming
  • Video – Some Thoughts on Bitcoin with Sully

All Money is Nothing but a Cultural Construct

So gold is as useless as bitcoin. Both are simply societally agreed upon stores of value. With gold the long history of that convention (essentially since the start of human civilization) has conditioned us to believe in its worth. But that is  a purely cultural rather than a biological belief. Imagine yourself stranded on a small island in the Pacific for a year. What would you rather have – a years worth of drinkable water or one hundred ounces of gold? In fact there are probably at least twenty or thirty items that you would rather have in your possession before you even thought about gold as a thing of value.

The interesting thing about cultural values is that they can last for centuries – millennia even – and then quickly disappear without a trace. Like fashion – what popular one year is a joke the next and gold may be going through this process as we speak.

Bitcoin is a Better Store of Value

Why? Because bitcoin is better. If you wanted an anonymous store of value universally accepted as a medium of exchange would you rather have it be portable? You can’t carry a billion dollars worth of gold on your flash drive. But with Bitcoin you can. 

This is the reason why Bitcoin is trading at $48,000 per coin having rallied more than 40% in the past few months while Gold continues to wallow at the $1900/oz. Level. Long Bitcoin / Short Gold has been one of the best trades of the year ever since we suggested it in November and the long term trend of outflows from one to the other should continue.

Volatility Ride of a Lifetime

Along the way however BTCUSD will no doubt see some heart wrenching declines. The asset is highly volatile and also very susceptible to market manipulation as few big players control most of the volume. It’s not unusual for Bitcoin to rise or fall by 10% in a day and given its volatility signature its possible – probably even – that it could see a 30% daily decline sometime over the next 6 – 12 months. Like foreign exchange  Bitcoin trades over the counter and on a variety of exchanges and is subject to no regulatory oversight. There are no “circuit breakers” like there are with  stock index futures which are regulated by the CME, so if the sellers want to swamp the market they certainly can.

That’s why anyone who is thinking of investing into Bitcoin must fully accept the prospect of losing 50% to 60% of their capital to short term fluctuations. One such fluctuation could come as a result of regulatory capture in reverse.  The term regulatory capture usually refers to  the ability of industry leaders to manipulate and corrupt the very regulators that are meant to police them. The practice is especially egregious in such sectors as banking, energy of high tech. 

“Soft” Regulation is Coming

But regulators can turn the tables on Bitcoin in a couple of interesting ways. Bitcoin is anonymous and fully fungible into fiat currency creating worries that governments will outlaw it in because they cannot control it. But there is actually no need. Although Bitcoin itself is anonymous governments can create KYC (Know Your Customer) Rules on the very exchanges that it and any other crypto currency. There is no need to regulate Bitcoin if you can regulate the exchange and therefore obtain all the trading positions of your citizens. Furthermore, policymakers can create mark-to-the-market tax rules that would force holders of Bitcoin to pay any capital gains taxes on the floating profits at the end of each year even if the position remains open.

All of this  “regulatory capture in reverse” is sure to have a dampening impact on the asset, but it is unlikely to destroy its long term appeal. Bitcoin is digital, portable, fungible and scarce and as long as it continues to hold those characteristics it will be a much more attractive than gold and will overtake gold’s primary function – e.g. be the investment alternative to fiat allowing investors to quickly shift into the asset in times of turmoil.

How high can Bitcoin go? No one knows. One rule of thumb is to use historical analogue from another time and another useless asset – the Dutch tulip. At the height of the tulip mania craze the most desirable tulip was worth the price of a house. If that’s a rough estimate of Bitcoin’s terminal worth then there is a long way to go towards the 150K-200K valuation. But from here to there the path is almost certain to be volatile  and anyone who is thinking of the Bitcoin trade should steel themselves for the crazy gyrations ahead.

Some Thoughts on Bitcoin with Sully