Bitcoin And Gold: What's All The Fuss about?

My partner and I have been managing client's assets each for over 37 years. Throughout our
investing careers, there have been times when certain assets captivate the imagination, earn the
trust, and yes, even the hype of investors like few things can. The Dot-Com Bubble, the Tulip
Mania, the Pet Rock and Beanie Babies are a few things that come to mind.

Bitcoin and gold are two of the most recent popular "alternative" investments that many
investors are turning to, and which many refer to as a safe haven. Now I'm not saying that the
Beanie Baby craze was a perceived safe haven but all of these "investments" have something in
common, namely, they are worth only what someone is willing to pay for them.

In the case of Bitcoin and gold, their appeal largely stems from the perception that they're inflation-proof or
crisis-resistant but their value is truly only based on what the next person is willing to pay for it.
Think about this for a moment, what is the book value, growth rate, earnings or dividend yield
for either of these assets? Since obviously neither of these have them, how does one value them?
Bitcoin has often been called "digital gold," implying that it offers the same stability, value-
retention, and inflation resistance as its physical counterpart. However, this comparison misses
some key issues:

1. Bitcoin's Extreme Volatility: this is one of the biggest drawbacks of Bitcoin. Over the
   past few years, Bitcoin's price has swung dramatically from $20,000 in late 2017 to
   below $4,000 in early 2019, then to highs of over $60,000 in 2021, only to drop again to
   under $16,000 in 2022 and then hit an all-time high after the recent election of almost
   $90,000. While price swings are natural for any asset, Bitcoin's fluctuations are
   particularly extreme, making it unpredictable and unreliable as a safe-haven asset.





2. Regulatory Uncertainty: Bitcoin along with all crypto currencies, remain under
   significant regulatory scrutiny worldwide. Governments and financial institutions are
   increasingly examining how to regulate cryptocurrencies due to concerns over security,
   taxation, and environmental impact. With the recent increase in regulations surrounding
   cryptocurrency trading and mining, Bitcoin’s future is less certain than ever. Regulatory
   changes can significantly impact Bitcoin's value, which undermines its reliability as a
   long-term investment. President-elect Trump seems to be a proponent of Bitcoin so
   regulations might be easing but remember, eventually a new administration will take over
   from him and if they aren't believers or supporters watch out.





3. Environmental Concerns: Bitcoin mining consumes a massive amount of electricity,
   much of which comes from non-renewable sources. The cryptocurrency's environmental
   impact has become a subject of major concern, with some countries even banning mining
   activities. As global attention on climate change intensifies and the energy demands of AI
   continue to rise, Bitcoin's energy-intensive nature could eventually curtail its appeal in an
   era of advancing sustainable technology.





4. Limited Use Case Beyond Speculation: Unlike gold, which has industrial applications
   and is used in jewelry, Bitcoin's utility outside speculative investment is limited. While
   some argue it could become a universal currency, that dream remains far from reality
   primarily because of the aforementioned reasons.

While we have focused on Bitcoin above, much of what we have written applies to any cyber-
currency or digital asset.
Gold has long been considered a safe-haven asset, particularly during times of inflation or
market turbulence. While gold is far more established than Bitcoin, it also comes with its own set
of issues that potential investors should consider.

1. Gold's Limited Returns: Historically, gold tends to underperform compared to stocks
   over the long term. During extended bull markets, stocks and other investments often
   provide much higher returns than gold. Since gold does not pay dividends or interest, it
   relies solely on price appreciation for gains, meaning whatever the next person is willing
   to pay for it, which can make it less appealing in a high-growth environment. For
   investors seeking returns, stocks or real estate may be better long-term investments.





2. Correlation with Inflation: Gold is often touted as an "inflation hedge," but its
   performance against inflation has been inconsistent. While it sometimes retains its value
   during periods of high inflation, gold's value is still influenced by numerous factors,
   including interest rates, currency strength, and investor sentiment. As a result, gold does
   not always rise in value when inflation is high. For example, in the early 1980s, when
   inflation surged, gold prices actually fell significantly from over $800/oz to $360/oz by
   1986.





3. Storage and Security Costs: Storing physical gold safely comes with additional costs,
   whether through purchasing a safe or renting a secure storage facility. Even "paper gold"
   investments like gold ETFs often come with management fees as well as something
   called "contango" which is basically the selling of expiring futures contracts that the ETF
   holds, instead of actually holding physical gold, and replacing them with a different set of
   futures contracts that expire further down the line. Over the course of time, "contango"
   along with the other expenses can eat away at your returns making gold a less efficient
   store of value than it might seem on the surface.





4. Political and Economic Risks: Much of the world's gold is mined in politically unstable
   regions, which can impact supply and, ultimately, prices. Additionally, governments can
   (and have) restricted gold ownership or confiscated gold during crises. For instance,
   during the Great Depression, the U.S. government issued an executive order forbidding
   private ownership of gold, which restricted citizens’ access to their own gold reserves.
   While Bitcoin and gold can play a role in a diversified investment portfolio, neither asset is a
   "magic bullet" for financial security.

Bitcoin and gold have undeniable appeal as alternative assets. The technological allure of Bitcoin
and the timeless significance of gold make them compelling choices for investors. However,
neither is foolproof. Bitcoin's volatility and regulatory challenges, along with gold's inconsistent
performance against inflation and additional costs, make them less than ideal as the "safe
havens" they're often portrayed to be.

The best way to protect wealth is to build a balanced, diversified portfolio that aligns with your
financial goals, risk tolerance, and investment horizon. Instead of putting all your faith in
"alternative" assets, focus on strategies that have consistently proven effective over time. That's
the real key to navigating financial uncertainty—without being swept up in the craze.

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