Is Bitcoin Millennial Gold?

In a recent report cited by MarketWatch, JP Morgan pitches the notion that gold is on its way to being the new old money. Supposedly today’s seasoned investors are the last generation to own it and its 5000 year history as a store of value is in its last days:

Here’s how bitcoin could soon be worth $146,000 according to JPMorgan

”There is little doubt that this competition with gold as an ‘alternative’ currency will continue over the coming years given that millennials will become over time a more important component of investors’ universe and given their preference for ‘digital gold’ over traditional gold,” the research team wrote in the research reported dated Monday.”

But this is just another way of saying inexperienced investors like cryptos. You could say the exact same thing about dotcom stocks in 1999.  Boomers bought heavily into the bubble a couple decades ago, driving tech and telecom stocks up to crazy valuations, too. And they got burned as the bubble imploded.  JPM could just as well have written in early 2000 that the many doomed dotcoms “will become over time a more important component of investors’ universe”.

Extrapolation of the recent past is easy, but when has it been a good way to forecast the future?  Are we to take what’s hot with inexperienced investors as a portent for the rest of time?  They like digital tokens now so they always will?

If anything, this just tells us that JMP wants you to sell your gold.  Maybe its more seasoned clients want to buy it.  Or maybe Wall Street and Silicon Valley just don’t want you to realize there’s an alternative to buying their overpriced and overhyped securities.  You sure wouldn’t know by following most of their media that stocks have underperformed gold for the first two decades of this millennium.

So now, after a five thousand year track record as durable money, we are supposed to believe gold is about to be rendered obsolete by mere bits of disembodied technology.  This isn’t to say there no merit to owning bitcoin – it could be another tool in the defense against central bank money – rather that it would be a mistake to view it as a substitute for gold.  

Despite bitcoin’s incredible run of late, there is little to indicate it has the essential safety properties of gold.  It performed more like stocks in the corona crash earlier this year.  In fact it’s more closely paralleled the rise of tech unicorns and speculative SPACs – sort of like a tech stock without the stock – a tech stock without any of those boring encumbrances like assets or revenue or earnings.  It’s certainly been a beneficiary of the flight from dollars and other fiats, but when there’s a flight from stocks, it’s been shaky at best.  If bitcoin is a substitute for anything, it’s tech stocks.  For the safety of gold, there is only gold.  

Much is made of the advantages of digital money.  But that’s not new.  The dollars in your bank account are digital.  In these days when the virtualness of something is supposed to provoke only oohs and aahs, the tangibility of other things can still be a huge advantage.  A key reason gold is prized is that it is a tangible, material thing.  It inherently cannot be produced cheaply.  With digital tokens this property can only be artificially imitated.  Your gold cannot be hacked by a stranger on the other side of the world, and there is zero threat of some brilliant coder inventing yet another competitor.  It cannot be reproduced or copied.  It will still be yours if the power goes out or if the network goes down.  Whatever else it may be, bitcoin is not digital gold.

6 thoughts on “Is Bitcoin Millennial Gold?

  1. Bill Terrell says:

    This view is getting some support from within the crypto community. Noelle Acheson of CoinDesk writes

    “The main gold exchange-traded funds (ETF) are losing funds – that much is true. SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) have seen outflows of over $4.4 billion in the past month alone, according to FactSet. The Grayscale Bitcoin Trust, however, which trades under the symbol GBTC and is managed by Grayscale (owned by DCG, also parent of CoinDesk), has seen inflows of over $1 billion in the same period, according to the latest 8-K filings.
    But the two trends are not necessarily correlated.
    Gold fund outflows are not that unusual, as the below chart shows.
    What’s more, the latest movements come after a phenomenally successful few months – since the beginning of 2020, GLD and IAU saw inflows of over $25 billion, marking the strongest year for inflows over the past decade. Even with the latest outflows, it has been a very good year for gold funds.”

    Investors should bear in mind that one of the arguments for owning gold is its low correlation with stocks. We shouldn’t be surprised to see weakness in gold prices when enthusiasm about stocks is high. This dovetails with rising Treasury yields as well.

    We are also in a period for which Synthetic Systems has also been forecasting weakness in gold prices, and cryptos don’t figure into its model.

  2. Milton Kuo says:

    A lot of arguments made by Bitcoin True Believers have been easily debunked by people who have been through multiple bubble cycles. One of the newer, better arguments I’ve seen is that it is the technology and its network effects that give Bitcoin or any cryptocurrency is value. However, that is also a fallacious argument. The software is open source and anyone is free to copy the software and run his own cryptocurrency based on that software. The network effect idea is perhaps a better argument for the intrinsic value of a cryptocurrency but the value of the network effect is in the infrastructure, the basis for a distributed means of transferring money. The value of the network should be reflected in the network itself, not the tokens being exchanged on the network.

    We currently have a currency transfer system already in place. It can be SWIFT, ACH transfers, Visa, MasterCard, etc. The existing currency transfer system has the largest network of any monetary system on the planet, vastly larger than the network of cryptocurrencies. However, what we do not see is the tokens being transmitted over those networks (reserve currencies such as US dollars, Swiss francs, Japanese yen, Euros, etc.) increasing (or decreasing) in price at vertiginous rates. A 10% daily move in a reserve currency is almost unheard of and a 1,000% yearly upside move (or 90% downside move) even more so yet that is a relatively common occurence with cryptocurrencies.

    1. Bill Terrell says:

      Thanks for the thoughtful comments, Milton. The lack of having gone through multiple bubble cycles neatly explains the readiness with which relatively inexperienced “millennial” investors are going gaga over cryptos. JPM mistakes this for a permanent generational shift. Such pronouncements recall Irving Fisher’s infamous proclamation that stock prices had reached a “permanently high plateau” in 1929 just prior to losing nearly 90% of their value over the next couple of years. Whatever else it may do, bitcoin is not about to replace gold. It’s certainly hasn’t been replacing gold the past few days.

  3. Jk says:

    It’s important in my mind that central banks hold gold and are increasing their holdings.
    Also who will maintain the bitcoin system once all coins are mind?

    1. DaveGillie says:

      Once all coins are mined, transaction fees will be enough to maintain the system.