Structuring a Hedge Fund Business
A successful business is built before there is one. The way any business is structured has very long term implications on how it is taxed. Also since markets provide almost the same return to everyone, the ability to avoid taxation is a major competitive advantage for any hedge fund. Therefore, over the years hedge funds […]
Disadvantages of Non-Interest Income
In the previous article, we learned about the non-interest income at various commercial banks. We have also understood what these sources of non-interest income are and why they are preferred by many banks. It is true that there are several advantages to having sources of non-interest income. However, it is equally true that advantages are […]
How Decisions Made By Central Banks Affect the Stock Market?
In the past month, the Dow Jones Industrial Average had seen a spectacular fall. The market had crashed more than a thousand points. This crash happened on the speculation that the Federal Reserve i.e. the central bank of America is planning to raise interest rates. The mere mention of the possibility of an interest rate […]
Phases of Growth and Valuation Models
Dividend discount models are based on the assumption of constant or linear growth. However, a mere look at the empirical data will prove that this is not the case in reality. Growth is almost never linear or constant. In fact, in strategic management, the concept of product or company life cycle is taught wherein there […]
Overconfidence Bias
Contrary to traditional economic theory, investors are not completely rational human beings. Instead, they are also emotional. This also means that they feel joy when they succeed and pain when they fail. This is the reason that when some investors succeed continuously for a small period of time, they start becoming overconfident. In behavioral finance, […]
Gold has always been the alternative asset class. Whenever people lose faith in the value of the stocks that they are holding or even in the value of any currency, they typically sell their holdings and invest the proceeds in gold. However, of late, Bitcoin has burst onto the scene.
Gold is no longer the only place where money can be parked in times of crisis. Bitcoin has become a viable alternative. Given the humungous price rise in Bitcoin in the recent months, at the present moment, Bitcoin seems to be overtaking gold. The price of gold is reducing while the price of Bitcoin is going through the roof.
Many critics believe that Bitcoin is probably the largest bubble that the world has ever seen. It is often compared with Tulip mania in terms of scale. Warren Buffet has said that Bitcoin is an efficient way of transmitting money. But so are checks and money orders! If checks and money orders are not worth $20,000 each, then why should Bitcoin be?
In this article, we will make a comparison between the alternate investment classes i.e. gold and Bitcoin.
The first and most important difference is that gold is actually a physical commodity. Investors can touch and feel it. On the other hand, Bitcoin only exists in the digital world. It does not exist in reality.
It is almost impossible to reduce the purity of gold or corrupt the metal. People are well aware of how they should check for pure gold. On the other hand, Bitcoin is largely unregulated. Hence, it is open to manipulation. The fact that there are no governing bodies regulating Bitcoin makes it even more prone to scams.
It is no coincidence that Bitcoin has rallied so much in the past. This is probably the result of insider trading at increasing prices. This creates the illusion that the price is rising and people from the sidelines are drawn into this investment. The original scammers then dump their holdings, liquidate their stock and disappear. The bottom line is that Bitcoin is very difficult to track. Even if there is online theft and value worth millions is stolen, there is very little any investor can do about it. It is for this reason that Bitcoin is used as an intermediate asset class and not a final destination to store value.
An alternative asset class is all about liquidity preference. In simpler words, what would you want to be holding in the event of a crisis, gold or Bitcoin? The answer to this question is inevitably gold in most cases.
Gold has a long history of surviving crises. It has been used for centuries by various civilizations. Each time the value of fiat money comes to zero, gold becomes the default currency. This decision is not taken by any government. Instead, it’s taken by the market itself.
Even in the middle of the crisis like the Venezuelan hyperinflation, gold can still be exchanged for goods and services! Bitcoin is relatively new and has no record of successfully navigating the crisis.
It is difficult to even imagine, how Bitcoin will even work in a crisis situation where there might be no electricity and hence the means for online transactions may be severely compromised.
The value of gold has been more or less stable for many years. True there have been price increases and even price drops. However, none have been as dramatic as Bitcoin.
For the past few days, Bitcoin has been increasing at a rate of 10% per day! The price has shot up from $1000 to $20000 in almost no time! Hence, Bitcoin is not a stable store of value. The price rises and falls very quickly. As a result, the amount retrieved by investors may be very different from the amount they had initially invested in Bitcoin.
The biggest question mark surrounding Bitcoin’s existence is its energy efficiency. Bitcoin is a disaster when it comes to energy consumption.
Energy generated by burning 12 barrels of oil is used to mine a single Bitcoin! Right now, all the Bitcoin mining activity in the world is consuming more energy than Nigeria, which is a country of more than 90 million people.
As and when the mining activity increases, it is expected to consume more energy than Japan which is the world’s second-largest economy. This is a big flaw in the Bitcoin model. The world is already energy deficient.
It would not be very prudent to divert energy from basic human requirements towards processing financial transactions. On the other hand, gold has no such problems. The mining of gold does not consume excessive energy. It has been carried out for centuries and is likely to continue unabated.
The bottom line is that Bitcoin seems like a fad, if not a scam. As an asset class, it is nowhere close to being as reliable as gold has been for centuries. In the short run, people might prefer Bitcoin over gold. However, it’s only a matter of time before the bubble bursts and gold is once again crowned the king of alternate asset classes.
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