Authored by Trey Reik, Senior Portfolio Manager, Sprott Asset Management USA, Inc. A highlight of 2017 financial markets has certainly been the explosion of interest in cryptocurrencies. We attribute growing interest in digital currencies to a bitcoin design toscano shared by many gold investors.
In short, resentment is mounting over the financially repressive policies of global central banks. It will come as no surprise that at Sprott, we assess the investment merits of gold and bitcoin to be substantially different. We view gold in its traditional profile as a reliable store of value and productive portfolio-diversifying asset. In contrast, while we recognize that bitcoin is the first killer application of the epically disruptive blockchain technology, we view bitcoin’s current investment merits as limited to potent speculation. Cryptocurrencies are in their Infancy Bitcoin is the market leader in the emerging asset class of digital currencies. Importantly, bitcoin is based on blockchain technology, which is essentially a distributed database used to maintain a constantly growing list of records, called blocks.
Each block contains a timestamp and a link to the previous block. The Immutability of Gold Quite simply, gold is gold. For over 5,000 years, an ounce of gold has been exactly the same: an ounce of gold. There are no variations or imitations.
Central banks hold gold because of its extraordinary density, rarity and immutability. Central banks do not hold diamonds or priceless art because of their infinite variability. There is no society on earth which does not regard gold as valuably precious. Only a few very powerful acids can destroy it, and gold does not even melt below 1,943 degrees Fahrenheit. Bitcoin, in comparison, is a string of code generated by software protocols and cryptographic algorithms. While a sophisticated programmer might take comfort in the technological impregnability of the blockchain, this type of intellectual security eludes many investors outside the Bay area and lower Manhattan.
In essence, bitcoin is shrouded in a dense cloak of ambiguity because few people comprehend the underlying protocols. The Extreme Volatility of Cryptocurrencies Because gold investment decisions are often fueled by emotion, precious metals have earned a reputation for volatility. Gold’s commodity characteristics expose the metal to the trading patterns of limits, stop losses and the aggressive trading tactics popular on the COMEX. Additionally, over long spans, gold can post high-percentage moves reflecting changing economic and monetary conditions. The extreme volatility of the cryptocurrency asset class, to us, belies any legitimate role as a store of value. With respect specifically to bitcoin’s volatility, roughly every year or so the currency experiences a rapid upward shock, followed by an equally rapid downward correction, reminding us far more of an enticing trading opportunity than a store of value. For thousands of years, gold has been an alluring target for plunder and theft.
24-karat gold coin from an apparently lightly-guarded Berlin museum. Gold, on the other hand, is an investment asset with a strong legacy of trust and oversight. Gold coins and gold bars are minted and refined to precise parameters for size, weight and purity. Institutional volumes of bullion are generally stored in the literal epitome of trustworthiness: impenetrable vaults. Similarly, individual investors generally store their gold bullion at repositories which have earned their utmost confidence, such as local banks or established bullion custodians. Whatever trust exists in the bitcoin network today relies on the dependability of the laws of math. A strong investment cue for bitcoin investors is clearly their lack of confidence in the human frailties of fiat-currency stewards.
In essence, the laws of math enforce the scarcity of bitcoin, while the laws of nature enforce the scarcity of gold bullion. Scale An intellectually attractive aspect of bitcoin’s design is its strictly limited supply. Bitcoin’s total circulation is hard-capped at 21 million units. 17, bitcoin in circulation totaled 16. At current mining run-rates, the bitcoin computer network mints 12. 5 new bitcoins every ten minutes, or 1800 new units per day, or 657,000 per year. This implies a current annual inflation rate of just below four percent.
Scarcity Value We offer two thoughts about bitcoin’s scarcity-value relative to gold. Looking Forward One aspect to gold’s value as both a monetary reserve and a portfolio-diversifying asset is the high degree of visibility into gold’s future market fundamentals. The above-ground gold stock is quite large and extremely stable, annual mine production measures only 1. Behind the conflict is an ideological split about bitcoin’s rightful identity.
The new software was recently released, and it will now be white-knuckle time in the bitcoin community through the end of July, as respective network operators choose whether to adopt the new software. It certainly appears in their collective interest to do so. We look forward to observing both these developments as well as updates from the Mt. It is a pregnant time for bitcoin and cryptocurrencies in general. If nothing less, we expect these developments to foster wider investor appreciation of the ephemeral nature of individual cryptocurrency protocols. This content may not be reproduced in any form, or referred to in any other publication, without acknowledgment that it was produced by Sprott Asset Management LP and a reference to www. SAM LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate.