I have been bullish on bitcoin and gold for many years and continue to be. I created the Bold index, which combines the two on a risk-weighted basis.
Bitcoin is on the floor, and the bulls are few, whereas gold is riding high and bulls are plentiful. What does the contrarian investor do?
I pair them because they are the world’s two most liquid alternative assets. Both have limited supply and share the notion that the world is eternally printing money, and it stands to reason that scarce assets will perform over time.
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They are both neutral assets – they are accepted around the world.
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They are also both rebel assets.
Bitcoin came from the grass roots of the computing world, and the authorities cannot control it.
Gold is also a rebel asset, because it holds governments to account.
If the gold price is going up too fast in a currency, it means capital is leaving the system.
I say that despite the central banks investing in gold. Let us be clear that it is not the G7 buying gold. It is the non-OECD states that are trying to diversify their reserves away from G7 bonds.
In the physical sense, bitcoin and gold have little in common, because bitcoin is not physical, it is virtual. At least, that is the “boomer” view.
Young people are much more comfortable with the idea of digital property, and the future is whatever they will make it to be.
Indeed, it comes with many advantages, such as the ability to transact instantaneously, securely and seamlessly across borders. It’s not just bitcoin, they say, this is the future of the financial system.
After bitcoin comes Ethereum, which underpins the $310 billion stablecoin market – much of which uses its network.
Stablecoins allow you to transact digital cash without using a bank.
A future without banks collecting fees from the payment system? Absolutely. Ethereum also enables transactions in pretty much anything and could be the basis of future stock and bond markets. Its operating system has been upgraded yet again, and it can deliver scale at low cost.
Bitcoin and gold: what’s the sentiment?
It’s all very exciting, but then again, so is technology. Bitcoin is, in some ways a tech stock and has always been correlated with the tech sector. Prices have been tumbling in tech, and it should come as no surprise that bitcoin has followed.
Fear drives more fear, and a falling price is always glee for the permabears. The bears point to the four-year cycle, which is currently in the dip phase. But tech is also in the dip phase, and does that have a four-year cycle? If there is a cycle, this one started early.
There is also the threat of quantum computing, which will have enough computing power to break the early bitcoins “mined” (released electronically into circulation) in 2009 and 2010.
It is possible that this could happen in the coming decade, but such powerful computers will surely be in the hands of tech companies before bad actors, and in any case, they will have other priorities should that come about.
In the meantime, all bitcoin needs to do is lengthen the private keys (passwords) with a network upgrade, and that will keep even these powerful computers at bay. The threat of quantum is overstated, but if people are worried about it, the price will feel it.
The miners operate at a speed 1 ZH/s (zetta hash per second). That is 1 followed by 21 zeros. That is a vast amount of computing power that needs to be broken. Still worried about quantum?
While the bear stories are well known for bitcoin, what are they for gold? There aren’t any, which is why contrarians should be wondering when the top is coming. The bulls say gold can do no wrong, as it is driven by infinite buying from central banks, who are prompted by geopolitical and macroeconomic fear, which is only rising. I agree, the world is unstable in parts, but nothing goes on forever.
I created Bold because these assets have similar long-term goals, exhibit low correlation, and are a natural pairing. That means they are both monetary assets, and when one is going up, the other is often going down. That is perfect for diversification.
Consider that you could have two assets, and they moved together. Alternatively, you could hold two assets that acted independently. The latter choice means you will have a less stressful life, and if you took the time to rebalance them when the prices had moved apart, you’d make even higher returns.
That is what Bold does with bitcoin and gold. Each month, we calculate their risk weights, which are driven by the past year’s volatility. The less volatile asset, gold, gets a higher weight. Then, at the end of each month, they are rebalanced, returning the weaker asset to its prescribed weight. By repeatedly buying low and selling high, good things happen.
Bitcoin is a globally recognised, highly liquid alternative asset with a unique position in the world of digital assets.
Following the Financial Conduct Authority’s policy shift last year, Bold is available to UK investors in the form of an exchange-traded product (ETP): my 21Shares Bitcoin Gold ETP (LSE: BOLD).
Today, bitcoin is more oversold relative to gold than at any point in its history. For those looking to bank some gold gains and diversify, Bold offers an intelligent solution.
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