The entity known as a Cameron and Tyler Winklevoss appeared on Bloomberg TV Tuesday to ply viewers with a new selling point for their growing cryptocurrency business: Bitcoin is “Gold 2.0.” Here's Tyler's spiel:
We think that bitcoin is like gold 2.0, so whatever your reasons for investing in gold – whether it’s scarc[ity], durability, portability, fungability – we think that bitcoin matches or beats gold across the board on all of those categories. It’s actually not scarce, it’s fixed. You can send it around like you send an email – it’s a lot harder to do that with bars of gold. The market cap right now of bitcoin is $300 billion. The market cap of gold is $6 trillion. We think that bitcoin disrupts gold. We’ve been saying this since the market cap was $1 billion in bitcoin. We’re 300 times more correct today, and we think that there’s a chance that we’ll be 20 times more correct from here on out.
All of this adds up to the self-evident case that prudent investors ought to cast off their crypto fears and buy up some bitcoin, preferably on the Winklevii's own Gemini trading platform, if they want to ride a wave of buying that will make them twenty times richer and incalculably more secure in their wealth.
There's an obvious appeal to a pitch like this. If the characteristics investors love in gold apply even better to bitcoin, then the 1,700-percent gains bitcoin has seen this year are only the beginning. If just a fraction of the money currently invested in shiny yellow stuff makes its way over to the blockchain, Cryptostan has happy days ahead. Here's Tyler Cowen making a similar argument:
To consider some other rough estimates, the total estimated value of the above-ground gold stock is about $7.5 trillion. Diverting 1 percent of gold holdings into bitcoin gets its value up to about $5,000. The current bitcoin price is several times beyond that, but a range of $15,000 to $20,000 again seems within the bounds of reason, at least to this observer. To the extent bitcoin is a store of value and a hedge, it is competing with gold more than with government fiat currencies, which ultimately are defined by their transactions uses.
This reasoning makes perfect sense if you've managed to nothing about where bitcoin demand really comes from. While it's plausible that goldbugs are dipping their toes into bitcoin, the real story behind bitcoin demand is families taking out mortgages to get in, grandmas getting crypto primers from their grandsons, South Korean shopkeepers plowing life savings into bitcoin, etc. This is hardly a casual rebalancing of assets into a new substitute. It's classic retail speculation.
But even if we grant their point that bitcoin is the new gold (about which there's plenty to argue), that's still...not the best pitch. Gold has been a notoriously bad investment over the past few decades, despite the legions of get-rich-quick schemes and late-night TV hucksters eager to convince you otherwise. After the post-Bretton-Woods gold boom of the 70s – which one could perhaps analogize to the current run-up in crypto prices – returns have consistently lagged behind stocks and bonds.
Of course, gold's usefulness is more about hedging risks in other asset classes than chalking up gains. On this point, it's done the job pretty decently, particularly during and after the global financial crisis. Good for gold!
Too bad bitcoin currently exhibits none of those qualities. For one, its value is as stable as its most diehardproponents (i.e., not very). Its recent performance sure is impressive, but it's also worrying – anything whose price can climb 40 percent in 40 hours can also experience the opposite. A serious investor establishing a bitcoin position is going to want to hedge it. That's kind of awkward if you're promoting bitcoin as a hedge.
Plus there's no way to know how bitcoin will perform during a bear market in stocks or a recession, because bitcoin hasn't existed through either of these events. It could be that swarms of investors stung by plunging stock prices will clamor for warm embrace of cryptocurrencies. But bitcoin's current mania has come amidst placid financial conditions and a strong economy. It's hard to imagine the price keeping up as the broader economy went south and highly leveraged retail speculators had to liquidate their positions to stay above water.
Which gets to the fundamental point, which is that gold exists in a functioning market and bitcoin does not. There are deep and liquid markets for gold futures where investors can easily bet on the price to rise or fall or whatever. Meanwhile, even with the introduction of bitcoin futures over the weekend, it remains close to impossible to short bitcoin. Between margin requirements, transaction fees and storage costs, traders are unable to take advantage of arbitrage opportunities that usually bring futures prices to within a few bps of spot prices.
This underscores the basic problem with bitcoin as a stable, predictable financial asset: it has no natural sellers. As UBS's Paul Donovan wrote Monday:
Cryptocurrencies only have value if accepted as currencies. However, they cannot be used for the most important transaction in an economy, and cryptocurrency supply can only rise and never fall (making them a poor store of value). To date, using cryptocurrencies requires (effectively) a simultaneous asset sale and purchase of goods or services.
Then again, who would say no to an asset that can only go up?