Chris’ note: The rise of bitcoin is one the most profitable megatrends we track for you. Bitcoin is up 151% this year alone. And it’s up 4,130% since colleague Teeka Tiwari first recommended it to his readers in April 2016.
So sparks flew in our mailbag when our globetrotting gold investor, Tom Dyson, called bitcoin “totally useless” and said it was “going to zero.” Some readers backed Tom’s view that physical gold is more reliable. Some said he was missing the point entirely.
It’s been a fascinating debate (more on that at the end of today’s dispatch). And I wanted to take a deeper dive. So I caught up with Tom by phone to hear his thoughts. He gave a surprising answer on why bitcoin is so hard to value…
Chris Lowe: Let’s start with that controversial opinion on bitcoin you published in your e-letter, Postcards From the Fringe. [Sign up for free here.]
You said bitcoin wouldn’t stand the test of time as a monetary asset, like gold has. That’s because it has no intrinsic worth outside of its function as money. Gold is used in jewelry and technology. By contrast, you said bitcoin was just a “clump of electrons.”
Tom Dyson: I think about this one a lot. It’s complicated. Bitcoin is very tricky to value. Gold is, too. They’re almost religions.
They’re not the kind of investments I typically look at. I’m an analyst of stocks and bonds. I look at cash flows. I like to be able to value what I’m looking at in terms of potential payback.
Bitcoin and gold don’t have any cash flow associated with them.
These are not traditional investments. You have to make a leap of faith into them. I think this goes even more for bitcoin than it does for gold. Bitcoin is totally a leap of faith.
You’re putting your faith in something playing a much more prominent role in the future. You’re also betting other people are going to buy it.
That’s effectively what you’re doing with bitcoin and gold. There’s a hardcore group of people you might call “bitcoin bugs.” They love bitcoin. They’re in the cult.
In order for bitcoin to go up, you need to convert people who are not bugs. You need the generalists. You need the everyday people to start buying into these things. That’s the only way they go up.
You’re betting the crowd is going to choose that asset. It defies any form of fundamental analysis.
You can make a really good case that bitcoin is worth zero. And you can make a really good case that bitcoin is worth $1 million.
You can do the same for gold. Although gold does have some industrial applications. But let’s not fool ourselves. If people weren’t buying and holding gold as an investment – if people were using it solely for industrial purposes – gold’s value would be way lower.
You could also argue that bitcoin helps move money around the world anonymously – and in a way governments can’t tax and track. That’s a benefit. But I also think it’s a liability.
The point is I don’t know where bitcoin is going to go.
What I wrote was that for me, it doesn’t seem to stand up to long-term adoption. That’s because it doesn’t actually have any intrinsic value.
I took the position that I’m not interested in it. I may have used language that was a bit harsh… which I’m regretting, now that bitcoin is going so high.
I called it a “Ponzi scheme” and a “tulip bubble,” which are pretty disparaging. Maybe I should have just said bitcoin is not my cup of tea, and I’m going to avoid it. But I sort of waded into the debate.
Bitcoin is certainly interesting. I’m curious to see what it does. But I’m not going to be involved. I’m going to stick to gold.
Again, you could argue that gold has a similar property to bitcoin – in that it’s sort of a cult, and you can’t really value it on any fundamental measures.
But I like the fact that it’s been around for so long. I also like the fact that I can sleep well at night holding it. And I’m pretty sure it’s going a lot higher than where it is today.
I just don’t have that same feeling with bitcoin. It’s highly speculative. It could just as easily be outlawed… or banned… Or some other, better crypto could come along.
Maybe everyone should have a couple of percent of their portfolios in bitcoin, as a speculation. It could work out. But I’m not going to do that.
Chris: What about the idea that the rise of bitcoin is pulling investors away from gold?
Tom: That’s a good question. I’ve heard some stories about this. I don’t know if they have any validity. It seems a little ridiculous to me. But I don’t know.
I look at the broad picture. I look back to the year 2000. Gold has gone up so much since then.
Gold was selling at $280 an ounce in 2000. Today, an ounce of gold sells for $1,845.
Gold has gone up even in terms of stocks. Gold has done extremely well over the last 20 years compared to the Dow and the S&P 500. Since 2000, gold has risen 556%… while the Dow and S&P 500 have risen only 160% and 155%, respectively.
Gold is doing exactly what it should be doing. I’m getting richer holding gold than I would holding dollars or stocks.
Personally, I’m going to hang in there and keep holding gold. I’m taking a 10-year or 20-year view on this.
A fiscal crisis is brewing in the U.S. The coronavirus has brought that crisis forward much faster.
The feds are now spending far more money than they were spending before. The deficits are much larger. Money-printing is much more abundant. The economy is much weaker. The debt bubble is growing faster. And on and on…
Those are the real fundamentals. This year, they’re accelerating. Ultimately, that must be good for gold.
Chris’ note: Today’s Q&A is excerpted from our Legacy Inner Circle advisory. That’s where we take deep dives into the big moneymaking ideas on our radar here at Legacy Research. To find out more about how to become a member, read on here.
Regards,
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Chris Lowe
December 10, 2020
Bray, Ireland