Bitcoin, Gold and Other Popular Delusions

From time to time I choose to write one of these so-called “blogs” and when I do, it usually takes the form of an op-ed piece and NOT EVER advice. There are several reasons for this including, but certainly not limited to: 1) this is not the forum to deliver advice 2) it is very likely that the piece will be read by someone I do not know and so I wouldn’t be giving that person advice written or otherwise and 3) there is not enough room here to deliver a full and proper accounting that goes along with “advice”.

I write these pieces to engage the reader in thought regarding topics that are being discussed in a less than thorough or otherwise irresponsible manner – in my opinion. Generally, this type of “discussion” is occurring over one of the many popular social media forums.

The opening line of the FOREWARD to my 1932 edition of Extraordinary Popular Delusions and the Madness of Crowds reads: “All economic movements, by their very nature, are motivated by crowd psychology.”

The following comes from the PREFACE to the 1852 Edition of the above-mentioned text: “We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit.”

To me, nothing could fit the circumstances described above more than the activity in and the conversation over, cryptocurrencies generally and Bitcoin specifically.

Look, these things are not currencies – by definition. They do not meet the criteria. They are neither stable stores of value or widely accepted as mediums of exchange – two of the major hurdles to meet the economic definition of currency. Ask yourself, would I want to be paid in a form of “currency” that might fluctuate 70% in a few days? One day you’d be patting yourself on the back and the next day you’d be breaking your arm off to beat yourself with it. If you sold your house would you accept bitcoin as payment knowing that it might be worth 10%-15%-20% less before the funds ever made it to your bank account?

I was engaged in this very conversation recently with someone in the finance industry. In fact, his firm’s name is on a group of mutual funds and ETF’s. I stated that he was handling the information irresponsibly and that someone in his position should be careful how they referred to such exotic vehicles. He asked me how I would refer to the digital assets if not “currencies”. I stated that – in economic and finance terms – we simply don’t know what they are at this point or moreover, what they will become.

It’s important to note that the very characteristics that draw the masses to them (volatility and the idea of getting “rich” quick) are also the very ones that disqualify them from being classified as legitimate currencies.

Taking this critique, a step further, these things are not investments. Cryptocurrencies do not exist in physical form. There is no underlying cash flow stream that can be analyzed or forecasted. These are important points to consider before using the term “investment” when describing this universe of alternative financial vehicles.

Bitcoin is often compared to gold but it really shouldn’t be unless it’s to show how they are NOT alike. This is another conversation that is full of hype and myth. It’s a real shame that financial institutions that hold themselves out to be credible sources of information aren’t more careful and precise with

their commentary and advice – see a recent Morningstar article: The Conventional Investor’s Guide to Bitcoin, March 8,2021. I don’t mean to pick on Morningstar, it’s just the latest in a number of articles that I take objection to. Social media (i.e., LinkedIn) is full of commentary from folks representing financial institutions putting out information in a way that I believe is irresponsible at BEST. I happen to think that they’re just promoting their own business.

First of all, adjusted for inflation, gold is worth less today than in was January 1, 1980. The metal has been neither an investment nor an inflation hedge. This is based on the 41-year time period 1/2/1980 – 12/31/2020, using usinflationcalculator.com/inflation/historical-inflation-rates/ to access historical inflation rates and my Bloomberg terminal for gold (XAU) pricing on 1/02/80 and 12/31/20.

Gold does, however, have some limited industrial uses as well as its demand in the jewelry industry. It is also very relevant that it has a history, spanning thousands of years, of being used as a “currency”. But it’s also true that other things like tiger claws, copper, precious stones and chickens have also been used as “currency”. These items were used as mediums of exchange in the barter systems that predated any sophisticated financial systems that exist today.

I totally realize that dealing with the minutiae of financial detail (i.e., historical pricing and inflation data) is very boring and “not sexy” as compared to having a Coinbase app on your phone and watching the value of your digital wallet swing about every couple of minutes throughout the course of the work day. I Hear you; Got it; But so-called financial professionals shouldn’t see it that way – again in my opinion.

The Dutch Tulip Mania is recorded with great detail and clarity. It occurred in and around Holland in the 1600’s following the introduction of the exotic species into western Europe. It first became highly demanded by the affluent then the middle classes followed suit. It is recorded that at one point a single bulb traded for 6 times the average person’s salary. It is also written that bulbs even came to be used as a “medium of exchange”. The height of the mania came in 1637 and then the collapse started as folks who had bought on credit – hoping to repay at even higher prices – were forced to liquidate. By 1638 prices were back to where they had begun. It is worth noting that the Dutch, up to this point, had been known as the most prudent people in all the land.

It is in no way obvious to me that today’s Cryptocurrencies are legitimate, lasting financial vehicles that will prove to be a store of value. I do, in fact, wonder if the current state of affairs surrounding these new alternative vehicles will turn out to be just another mania. If so, a lot of people may look back with some chagrin at how their “certain fortunes” never blossomed.

mike