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Gold versus Bitcoin

Gold versus Bitcoin

I favor gold over Bitcoin as a long-term store of value.  I do think that blockchain technology is here to stay for a long time. However, I question the long-term viability of Bitcoin.

But before I get into that I want to say that if someone loves Bitcoin and hates gold they are free to own Bitcoin and no one will force them to own a single gram of gold! The opposite is also true. You can also own some combination of both!

For me, I’ve chosen to own much more Gold than Bitcoin but I still own both.

I’ve written about how I buy bitcoin and also about bitcoin arbitrage. I’ve also written about owning physical gold outright and physical gold through Goldmoney.

I do think having a very small percentage of my assets in crypto currency is appropriate for me but I’m leery of having too much of my net worth in cryptocurrency.

So with that in mind I present gold versus Bitcoin. This is a comparison between the two as I think of it. What you value or find important will likely be different.

That is the great thing about free markets: there doesn’t have to be one answer that is forced on everyone.

What I like about Bitcoin

International Value Transfer

I think BTC beats everything else out there for international value transfer. I’ve done international wire transfers and domestic wire transfers in traditional government fiat currency and Bitcoin is faster, easier and cheaper than anything else I’ve used.

Bitcoin has Advantages over Fiat Money

Dollars (and other fiat money) are constantly being devalued and destroyed via fractional reserve banking and central bank debt monetization and money “printing”. The total number of Bitcoins that will ever exist is set by how the bitcoin algorithm is coded.

What I don’t like about Bitcoin

It is Centrally Controlled

A disillusioned insider I came in contact with has swayed me to the opinion that Bitcoin is not decentralised. The decisions about Bitcoin are made by the Bitcoin Foundation and a few of the larger miners.

Bitcoin evangelists will tout Bitcoin as being decentralised. I’m open to new arguments and evidence supporting that Bitcoin is in fact decentralised but as of now I see Bitcoin as being centrally controlled.

It’s Direct-Use Value is Very Low

Some people argue that there is direct-use value in Bitcoin. It can be used as an experiment, political statement, etc. Others argue that Bitcoin has no direct-use value.

gold-versus-bitcoinEven if Bitcoin is valued for direct use I think that value is very low. Dollars have some direct use value as well, for example kindling, tacky wallpaper, etc, but it is a fraction of the value dollars currently command in trade.

The reason I think this is a problem is because the direct-use value (aka non-monetary use value which is also sometimes called “intrinsic value”) provides a floor.

Government fiat currencies and Bitcoin have little (or zero) direct-use. So when these mediums of exchange fall out of favor, they can go to zero or near zero.

Bitcoin Could be Replaced by a Better Cryptocurrency

Bitcoin has some issues in my opinion. Bitcoin could be improved to overcome those issues, but it is also possible one of the myriad of alternative coins (called “altcoins”) could become more popular than Bitcoin and eventually replace what is currently the most established and largest cryptocurrency.

Delay in Confirmations

Virtually all vendors require a certain number of confirmations after Bitcoin is sent before it is confirmed and is considered successfully sent. This is to avoid the problem of double-spending.

Bitcoin takes about 10 minutes per confirmation. In the world of the internet, 10 minutes is a long time. Some vendors require 2 or 3 confirmations, which would take between 20-30 minutes. That is a really long time.

Scalability

There are also concerns about the scalability of Bitcoin.

There are probably other reasons that haven’t even been invented yet that could make some new Bettercoin™ a superior choice to Bitcoin.

So while the number of Bitcoins is fixed the number of competing altcoins is not fixed.

Competing altcoins can serve to devalue Bitcoin. I like it when companies compete for my business to lower price but if I owned $1,000 worth of Bitcoin and then BetterCoin™ comes out and everyone switches to it, my $1,000 worth of Bitcoin could drop to a small fraction of a dollar in value.

The United States Commodities Futures Trading Commission (CFTC) declared Bitcoin is a commodity

Which means it’s taxable as a commodity.

Just because the government decrees that something is the case doesn’t mean that it is true.

Various elements of the US government can say that dollars are a store of value but that doesn’t mean they are.

I can disagree with the CFTC intellectually. But I obviously can’t ignore what the government says if I don’t want to get fined or go to jail.

Like most Americans I’m afraid of the Internal Revenue Service (IRS) so compliance with all appropriate tax laws is very important to me.

That means that every time I transact in Bitcoin I have to keep track of my cost basis and pay any appropriate capital gains.

Security

Mt. Gox, Bitfinex, and countless other exchanges have been hacked. You have to be kinda savvy to secure your Bitcoins. Plus, if you go the cold storage route you lose may of the benefits of Bitcoin as a medium of exchange.

What I don’t like about Gold

Gold isn’t used as Money or a Medium of Exchange

Few if any retailers will accept gold as payment for goods and services. One must first convert the gold into money and then spend the money.

Gold is not considered a currency and like Bitcoin does not get favorable tax treatment.

It could be Confiscated

The United States government has made gold bullion ownership illegal in the past and could do so again. Therefore any gold held in the US is susceptible to confiscation. I think it is unlikely this will happen again because not very many people own gold bullion, as compared to years past, but this is a possibility.

You Can’t use it to Buy Stuff Online

I can’t get onto Overstock.com and use physical gold in my possession to buy goods or services. What that would look like would be to mail in a shipment of gold, Overstock would wait until the gold arrives, and then ship out what I ordered.

I think the Paper Gold Markets are Manipulated

I think governments have a vested interest in keeping the price of gold down. I think the gold futures markets are manipulated down. While I think that this manipulation is not sustainable and eventually the price of gold will reflect supply and demand fundamentals, it is annoying in the short term. On the flip side, gold manipulation does provide a lot of great buying opportunities.

What I like about Gold

It’s Been Valued for 3,000 years

Despite all the changes since 1,000 B.C. gold is still valued by billions of people.

It has Significant Direct-Use Value

Gold is used in electronics, jewelry, dentistry, satellites, and decoration. Even though gold is not used as money or a medium of exchange today it is still valued by billions of people.

How many people would want US dollars if they weren’t used as money?

Gold is a Natural Element that Satisfies the Classical Requirements of Money

Gold is one of the least reactive chemical elements. Gold that has been lost on the ocean floor for hundreds of years is still in the same shape it was when the ship went down.

Gold is durable, portable, scare, divisible and uniform. Gold can act as a unit of account, a medium of exchange and a store of value.

Gold is Scarce

A new element that has all the properties of gold is unlikely to be discovered or created.

New gold can only be created in a nuclear reaction and gold can only be pulled out of the ground with significant effort and time.

Mining gold-rich asteroids would also be tremendously expensive and dangerous.

Gold can be used with Payment Technologies

Much of the below thought is from or inspired by Roy Sebag. Mr. Sebag makes a distinction between money technologies and payment technologies.

Money Technologies

Dollars and Euros are debt-based, fiat money technologies or assets that can act as a store of value (albeit poor stores). Gold is an asset that can act as a store of value. Bitcoins are an asset that can act as a store of value.

Payment Technologies

Credit card networks, Paypal, Apple Pay, Bitcoin, and Ether are examples of payment technologies. These are networks and systems that allow ownership of assets to be transferred.

Buying things online with a credit or debit card, Goldmoney, Paypal, or Bitcoin is simply ownership transfer of an asset via a payment technology.

In the case of credit cards, the credit card network is the payment technology and dollars are the money “technology” or asset being transferred.

In the case of Bitcoin, the Bitcoin blockchain is the payment technology which also has an integrated and inseparable unit of account, also called Bitcoins.

Gold can be used separately from a payment system (physically exchanged), or it could be used in conjunction with another payment system.

Goldmoney is one such service that combines physical gold ownership storage and transfer with the payment technology potential of internet based transactions.

Gold remains a fantastic store of value. I think the best of both worlds in money would be a gold-backed currency or electronic ownership transfer of Gold held at a trusted third party.

In Conclusion

Bitcoin has a very low (if any) direct-use value. That fact combined with the potential for Bitcoin to be supplanted by a superior payment technology makes me skeptical of Bitcoin as a long-term store of value.

I like gold because it has a 3,000 year history of being valued across cultures. It’s scarce and I think it’s extremely unlikely that another element will come along that will be able to replace the desired and historically valued properties of gold.

Not only that, but you can still make payments and spend gold in a way that takes advantage of the electronic payment systems that are so useful today.

Ultimately investors and consumers will make their own decisions. Gold and Bitcoin are competitors but they could also continue to exist side by side for some time.

That is just how gold and Bitcoin compare in my view. Which one do you prefer? Let me know in the comments section below!

I Own Too Much Gold

I Own Too Much Gold

I own too much gold.

Datta Phuge

Datta Phuge

I’m an advocate of holding gold. I think it is a key part of my portfolio but I own too much as a percentage of my other assets.

Not counting retirement-specific accounts, gold (and silver) make up 54% of my liquid net worth.

That is way too high for me!

So I decided to read what some public figures have said or written in regard to the percentage of a portfolio that should be gold (and silver).

The following is educational only and NOT SEC-investment-advice. So make up your own mind with the help of an appropriately licensed, registered, and SEC-anointed financial advisor.

Warren Buffett – Berkshire Hathaway – 0%

Warren Buffett doesn’t like precious metals. He has several famous quotes regarding why he doesn’t like the shiny stuff. While I wouldn’t be surprised if he actually did own some precious metals, but the way he speaks he acts like he doesn’t own any. I’m not a Buffett fan but I think you can learn from him if you carefully sift what he does from what he says or writes.

Source: http://www.fool.com/investing/general/2015/09/19/gold-silver-and-warren-buffetts-warning.aspx

Jim Cramer – CNBC – No More than 10%

Mad Money host Jim Cramer recommends no more than 10% in gold. He recommends owning gold via an ETF unless you have enough money to buy physical in bulk.

I’m not a Jim Cramer fan, but I include him because he is a big-time stock guy and yet he still recommends holding some gold. I think there is reason to believe the ETFs don’t hold the gold they claim to so I don’t like gold bullion ETFs. I also disagree that gold is just an insurance policy. Pure insurance (such as term or homeowners) is not an asset, it’s an expense. I think gold is an asset class in and of itself.

Source: http://www.cnbc.com/2016/03/03/cramer-best-insurance-policy-for-your-portfolio.html

Peter Schiff – SchiffGold and EuroPacific Capital – 5-10%

Peter Schiff recommends 5-10% in physical gold. I was actually surprised by this low number because Schiff talks about gold and silver A LOT. Schiff’s 5-10% allocation to gold and silver does NOT include mining stocks–but that is a different topic.

Source: http://business.financialpost.com/midas-letter/podcast-peter-schiff-on-gold-the-fed-and-the-worlds-addiction-to-stimulus

Tim Price – Price Value International – ~25%

In the September 2016 edition of Price Value International, Tim Price proposes owning roughly 25% in “real assets” like gold and silver.

Source: https://sovereignmanconfidential.com/pvi_onf_main

Mike Maloney – GoldSilver.com – 100%

Mike Maloney is the most pro-precious metals person I know of. He is 100% allocated to precious metals with 90% to silver American eagles and 10% to gold American eagles.

Source: https://www.youtube.com/watch?v=WGrK3AjKvnY

John – HowIGrowMyWealth.com – 10-25%

I would like physical precious metals to be around 10-25% of my liquid, non-retirement portfolio. I don’t have an opinion on the amount of silver relative to gold. I am of the opinion that silver is more undervalued than is gold and as a result has more upside potential.

I think gold and silver are a great way to preserve wealth but they are not a great way to build wealth since they don’t pay a dividend or yield. For many readers that might be obvious but I’m still learning!

I purchased a lot of gold in 2013, on the heals of the all-time highs, so much of my gold and silver holdings are worth less in fiat than I paid for them. So I intend to reduce my gold holdings as a percentage of my portfolio by focusing my savings and investments on other asset classes going forward. By doing this I can reduce my gold and silver holdings as a percentage of my assets without selling any of my gold and silver.

On the flip side, if my portfolio did have less than 5% physical gold I would consider adding to my holdings via gold maples, silver American eagles, and foreign-stored physical gold via a Goldmoney personal account.

It Doesn’t Matter Who Won

It Doesn’t Matter Who Won

In what was largely a surprise Donald Trump was elected the 45th president of the United States last Tuesday.

His most ardent supporters no doubt believe he will “make America great again” and his opponents feel as though the world has come to an end. While I won’t say that elections don’t matter there are several problems that won’t be solved, irrespective of who was or was not elected.

HowIGrowMyWealth.com caters to a global audience and because the United States is one of the top two largest economies in the world US politics and issues can have a far reaching impact on the global economy.

Government Insolvency

United States national debt is $19.1 trillion. The total debt-to-GDP ratio is 109% and has been rising. This means that United States is taking on more and more debt with less and less GDP growth to show for it.

Source: https://en.wikipedia.org/wiki/National_debt_of_the_United_States

Foreign central banks, whom the United States have been able to export inflation to in the past, have become net sellers of US treasuries.

Source: http://money.cnn.com/2016/02/17/news/economy/china-us-debt-dump-central-banks/

Neither candidate placed emphasis on reducing the debt. If Hillary was elected and raised taxes and regulations but didn’t cut spending that would slow the economy and reduce tax revenues (even at a higher rate) and the US government debt would grow.

Tax revenue in the US has never gotten above 13% of GDP anyway. So even if you wanted to grow government revenue, the best and only way to do so is to grow the economy.

Source: http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS?locations=US

If Trump lowers taxes and regulations that would grow the economy but not enough to pay for the out of control government spending. And since Trump in no way emphasized reducing government spending that will also cause the national debt to grow.

No candidate discussed both cutting spending and reducing taxes–which is what it would take to reduce the debt.

The continued expansion of debt in the US is unsustainable. I don’t think the US will do a traditional default on debt. The debt will most likely be reduced via monetization, which will destroy the value of dollars.

With international purchases of US debt in decline, and no political will for the US government to reduce spending, only the US Federal Reserve will be in a position to step in and purchase US debt.

Social Security and Medicare Insolvency

Social Security and Medicare face serious budget shortfalls according to the trustees of these programs.

Source: http://www.wsj.com/articles/social-security-medicare-trust-funds-face-insolvency-over-20-years-trustees-report-1466605893 Note: if you search for this article on google and click on it through the search engine you can access the full article even if you are not a WSJ.com subscriber.

Not only that but they account for a large portion of US government spending and hence add to the debt. The above cited WSJ article states, “Medicare and Social Security accounted for 41% of federal spending last year, up from 36% in 2011.” Proposing any change to Social Security that would reduce benefits or control costs is taboo in American politics so the issue will continue to grow worse until it blows up completely.

Candidate Trump has vowed to save social security and did not discuss any type of cuts or raised retirement age. Candidate Hillary held basically the same position.

Source: https://www.hillaryclinton.com/issues/social-security-and-medicare/

US Stock and Bond Markets are in a Bubble

I’ve written about how US Stocks and Bonds are in a Bubble. While I can say with certainty that US stocks and bonds are overvalued based on fundamentals and historical precedent I can only guess when these bubbles will burst. However, I think it is likely that President Trump will encounter a large stock market correction and perhaps a dollar crisis during his first (and maybe only) term. This day of reckoning can only be delayed not prevented.

Whichever political party is in control when the bubble bursts will be blamed. However, a bi-partisan coalition of Democrats and Republicans in both congress and the presidency, fueled by a reckless US Federal Reserve, have over the past few decades caused this problem and are responsible for the stock market and bond bubbles.

It would be best if the bubbles popped sooner rather than later. That would result in shorter term pain but it would be very beneficial in the long term.

But whoever is in power will always have the political incentive to delay the pain, which only makes the inevitable pain even greater when it does come to pass.

If the stock market does crash the Federal Reserve will do the few things it can do: lower interest rates and buy assets with printed money. With already historically low interest rates the Federal Reserve will likely resort to more quantitative easing, asset purchases and perhaps even negative interest rates.

Regardless of who had been elected these issues are not going away and even though the out of power party will blame the in power party; the reality is both are to blame.

Opportunity

Despite the huge challenges in store for the United States that would likely spill over into the global economy I’m very optimistic. There are practical steps I’m taking to prepare for these trials.

I’ve written about them on HowIGrowMyWealth.com for months. You can buy gold to protect yourself from a dollar crisis. I buy physical bullion but I also buy gold through Goldmoney.

I’ve written about how I keep a month’s worth of income in physical cash in the event there are capital controls or negative interest rates.

I’ve also written about investing in value-oriented foreign stocks and what metrics I use when evaluating a stock.

I think gold and select foreign stocks provide incredible value at this time and with the dollar unjustifiably strong now is a great time to trade dollars for better assets.

Politicians make a lot of promises and try to inspire hope in exchange for votes. If they are successful in doing good things then that would be a nice change but it is important to make preparations on your own. The problems the US faces are too big for one person to solve and if you put your hope in a politician or government you’re bound to be disappointed.

You Don’t Get Average Returns

You Don’t Get Average Returns

You don’t get average returns when you make an investment. This is a very important concept. The reason it is important is that most mutual funds and ETFs will list average returns, but as an investor you never get the average return.

Simple Example

average-returnLet’s illustrate this point with a simple example. Lets say you invest $100 and the investment loses 50% in year 1. Then in year 2, the investment goes up 50%.

Your average return is 0%.

But how much would the investment be worth?

Before I understood average returns I would have said $100. But the correct answer is $75. In order to get back to $100, after a 50% loss in year 1, the investment would need to go up by 100% in year 2.

What would it look like if you Did get the Average Return?

The average return of the S&P 500 between 2000 and 2015 was 5.71%.

Source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

average-return-5-71But if you invested in the S&P 500 during that same timeframe you would not get the returns of 5.71% compounded annually.

If you got 5.71% interest each year, and you invested $1000 at the beginning of the year in 2000, by the end of the year in 2015 your $1,000 would have grown to $2,432.

This illustrates the power of compounding interest over time. Over 15 years this theoretical investment went up 143%.

However, an actual $1,000 investment in the S&P 500 would NOT have gone up this much.

The Return You Would Actually Get

I would love it if I invested $1,000 and it was worth $2,432 15 years later.

But that is not how much your investment would be worth if you invested $1,000 in the S&P 500 on 1 January 2000 and sold on 31 December 2015. Your $1,000 would be worth $1,877.

sp-500-returnThe reason being that if an investment goes down, as the S&P 500 did 4 out of the 15 years during this period, it must go up by even more to make up for the losses.

It’s also worth noting that in order to get the $877 gain one would have to have held onto the investment through three consecutive years of losses over 9% and a 2008 drop of over 36%.

That would take an iron will.

The typical human reaction when faced with such losses is to sell to avoid further losses.

Why does the Financial Industry Use Average Annual Return?

The Vanguard 500 fund (VFINX) lists a 6.58% average annualized return over the past 10 years. If you really got 6.58% compounded each year the investment would roughly double in ten years, but this fund only went up about 50% over that timeframe.

vfinx

The main reason the average annualized return is used is probably because it makes the return of a fund look better than it actually is. Compound Annual Growth Rate (CAGR) would be a more useful and frankly honest metric because that is the rate an investor actually gets.

vfinx-returnI’m not trying to single out Vanguard. I think Vanguard is a good company but average annual performance is deceptive. And the chart on the right showing the hypothetical growth of $10,000 is also deceptive.

Source: https://personal.vanguard.com/us/funds/snapshot?FundId=0040&FundIntExt=INT

Why does it need to be hypothetical? We know exactly how much $10,000 invested in the VFINX in 2006 would be worth today. In October 2006 VFINX was trading at 122.62 and in October 2016 it was trading at 196.54. So a $10,000 investment would result in a gain of $6,028 for a total value of $16,028. But Vanguard lists the gain as $18,907.80 which would only be the case if this fund returned 6.58% compounded annually with no losses.

How Much Gain is Required to Recoup a Loss?

down-and-upThe problem with losses is that when trying to make them up and get back to even you are doing so with less money.

Not surprisingly, the greater the loss, the greater the gain needed to make it up. With smaller losses the gain only has to be slightly larger to get back to break even. However, with larger losses, higher and higher multiple gains are needed to recoup the losses.

The moral of the story is that 1) you won’t get the average return for an investment, so when you see an average return listed for an ETF or Mutual fund, you can ignore it, it’s not a useful number 2) when an investment goes down in value, it is costly.