My first article on this website was over 5 years ago, Inflation Destroys Dollars. I certainly did not have any idea that the price inflation would be triggered by the government’s response to the COVID-19 pandemic. I certainly didn’t anticipate the lockdowns and supply chain disruptions back in 2016.
I know the fiscal and monetary policy pursued by the United States and virtually all the world: money printing, onerous regulations, taxes and spending, would eventually result in significant price inflation. Government response to COVID-19 has made the situation worse and pulled the day of reckoning forward but it certainly isn’t the largest factor.
Timing is always a challenge and I was quite early.
Price inflation is here and it is happening fast enough where people notice it and are actually talking about it. Depending on who you trust and how you measure it, prices are rising at a rate of 6-10% per year now. I think what is interesting is that the government’s own numbers (the CPI-U) shows inflation at 6%. This is far beyond the 2% the Federal Reserve has been calling for.
In Inflation Destroys Dollars I write about how gold and silver are an inflation hedge. On 16 May 2016 when I wrote that article, gold was trading at $1,252 per ounce. As I write this it is currently up to $1,864.61, an increase of 48.9%. That is an annualized return of roughly 7.5%.
On 16 May 2016 Silver was trading at $17.14. It is now trading at $25.29. That is a 47.5% increase for an annualized return of approximately 7.3%.
So, if you think that inflation has been somewhere between 4% and 8% over the past five and a half year, gold and silver have on just kept up with inflation during this timeframe. Not bad but also not great. Gold and silver remain the boring reliable hedge and that is a good thing.
Value Stocks as an Inflation Hedge
Value stocks are another asset class I mentioned in Inflation Destroys Dollars. I didn’t mention specific funds. I have made some of my own individual value stock picks with some fantastic picks, but also some not so good picks.
Vanguard’s Selected Value fund (VASVX) is a mid-cap fund that could serve as a proxy for “value stocks”. It was trading at $26.41 on 16 May 2016. It is currently at $33.39. This is a return of 26.4% and an annualized return of 4.3%. Not stellar as I would not say this has kept up with inflation.
The Vanguard Value Index is a large cap value fund (VVIAX). It started this period at $32.49 and is up to $56.68. This is a return of about 74.5% and an annualized return of 10.65%.
A final example to look at, Vanguard’s Mid-Cap Index Admiral Shares Fund (VIMAX) started in this timeframe at $150.33 and is now at $320.62. That is a total percent return of 113% and an annualized return of 14.7%. Much better.
Compare those to the Vanguard 500 (VFIAX), which started this timeframe at $184.53 and is now at $432.9. The total return of this fund was 134.6% an an annualized return of 16.77%.
So while value stock fund did beat the rate of inflation and are a good hedge, they didn’t outperform your vanilla S&P 500 index fund.
Bitcoin as an Inflation Hedge
Compared to gold and silver, Cryptocurrencies, particularly Bitcoin has had all the action.
On 16 May of 2016 a Bitcoin was trading at about $454. Today Bitcoin is trading at $64,346. That is an astounding increase of 14,073% or an annualized return of about 146%.
Clearly Bitcoin has outperformed Stocks, Gold and Silver during this timeframe in an astounding way.
I own Bitcoin and I’m not anti-bitcoin. But I’m also not a Bitcoin maximalist. I think it is possible and perhaps even likely that Bitcoin will be replaced with a superior cryptocurrency that has some combination of faster transactions, higher transaction throughput, anonymity and or additional features. In my view Bitcoin in its current state is too slow and transactions are too costly for it to work as a medium of exchange for day to day transactions. These views are very unpopular with Bitcoin maximalists that ignore or downplay Bitcoin’s weaknesses.
However, Bitcoin has provided an incredible return and far outpaces inflation.
The 14,073% return is not just a result of inflation, although it is increasingly being viewed as a safe haven alternative investment.
Bitcoin has had several great tailwinds 1) It is an emergent asset class 2) It is trendy and popular and gets media attention 3) It is viewed as a Federal Reserve / dollar debasement hedge in place of gold.
Inflation Hedges
Protecting one’s wealth and purchasing power from inflation is important. Just keeping up with inflation is not ideal either, if the assets are not tax advantages, the government will tax the “gains”, and so purchasing power is eroded.
Let’s look at a simplified example. Say you frequently buy a widget or pay a service that costs $100 per year. Say the price goes up 5% per year due to monetary inflation. You also have a $100 investment that also goes up 5% per year. You’re still not keeping up with inflation because of taxes. If your $100 investment goes up 5% to $105, the government is going to want some taxes on that $5 gain. Say you’re on the hook for 15% capital gains taxes, the government is going to take their share and leave you with a $4.25 gain.
So you now have to come up with another $0.75 to pay for the item or service. Scale this up to include all of your expenses for the year and you see that you need to not only keep up with inflation, but exceed inflation so you have the money to pay the taxes on the gains.
In order to keep up with inflation your investment would need to be in a tax advantaged account that would lower or eliminate the tax burden owed or (again assuming a 15% gains tax) you’d need the investment to go up by about 5.9%.
This also shows how insidious inflation is. Not only is money worth less, but the government taxes the gains, even if there was no gain in terms of purchasing power.
One other thing to keep in mind, in the United States at least, realized gold and silver gains are taxed at the generally higher income tax rate rather than capital gains tax rate.
Are Gold and Silver Great Inflation Hedges Anymore
Gold and silver might not be very good inflation hedges anymore. If I owned gold or silver I wouldn’t sell unless I needed to rebalance my portfolio. I would expect these assets to at least keep pace with inflation, but unless the demand for gold and silver increases in excess of new supply, I don’t think gold and silver will beat inflation in the way needed in order to truly hedge for inflation when accounting for taxes. While it has produced a positive return in excess of inflation, it certainly hasn’t been a fantastic play over the last five and half years since I started HowIGrowMyWealth.com.
Peter Schiff is Chief Economist & Global Strategist at EuroPacific Capital. He is also chairman of a gold reselling company. He appears on RT and has authored several books about the collapse of the dollar. Peter is a vocal critic of the US Federal Reserve and warned loudly about the housing bubble prior to the 2008-2009 financial crisis.
I owe much of what I know about the Federal Reserve to Peter Schiff. I’ve read some of his books and used to listen to his podcast.
But I’ve come to realize that Peter Schiff is not someone you want to listen to for financial or investment advise. The following are some key areas where I think he goes wrong.
His EuroPacific Funds are Expensive and Underperform
I invested some money with his firm, EuroPacific Capital between December 2014 and December 2020.
During that 6 year timeframe, my investments with EuroPacific Capital went up 20.5% (about a 3.8% annualized return) which doesn’t sound too bad until you consider the S&P 500 doubled in price during that same timeframe and provided an annualized return of nearly 15%.
Peter’s firm EuroPacific Capital, charges what I consider to be high load fees and they underperform. For someone who preached about inflation, you’d think he’d make sure his funds at least beat inflation. They don’t. Looking up his funds on MorningStar, you can see the poor 5 and 10 year returns.
The EuroPac gold fund has a 5-year annualized total return of 2.29%. Inflation has been well over that for the past five years.
His Bias for Gold and Silver Blinds Him
Some might consider me a gold bug. I believe gold and silver are an important part of a diversified portfolio. But with Peter being a gold salesman, he is overly biased towards gold, this has caused Peter to miss out on an emerging asset class (cryptocurrencies) that while more volatile, has far outperformed gold. He has unsuccessfully predicted many tops to this asset class.
Not only that, but he’s failed to predict where all the Fed money printing would go. It’s gone into real estate, stocks, cryptocurrencies. It hasn’t gone into gold, silver and foreign stocks the way he has been predicting.
He Can’t Time the Dollar Crash
Peter Schiff is the boy who cried wolf.
Sometimes there is a “wolf” and when there is, it’s is important to let other people know there is a wolf so we don’t all get eaten.
Peter did correctly cry “wolf” before the 2008-2009 “wolf” reared its head. But he’s been wrong ever since.
Peter is a big fan of extended metaphors. So here is one for him. Peter is the boy who cried wolf, no one believed him and it turned out there was a wolf and he was right. Then he cried wolf again over and over again for the next 12 years as if the wolf was just behind the bushes, even though the wolf was 500 miles away.
His rhetoric that the dollar crash is imminent might be an effective sales tactic in the short term, but he has been wrong since the 2008-2009 financial crisis. It weakens his message and erodes his credibility to the point that I don’t listen to him anymore.
He has not been able to time when the dollar will crash. I agree the US Federal Reserve is reckless, is a prime cause of market crashes and price inflation. There is no question the dollar will continue to lose value. But will it happen all at once in a huge crash, or will it continue to decline 2-6% per year like it has for over the past 100 years? I don’t know and Peter Schiff certainly doesn’t know.
He has had no ability to predict how long the powers that be (the big banks, the military industrial complex, the Federal Reserve, the US government) can keep the dollar charade going. He will talk and write about how “The Dollar Will Implode When The Markets Figure X Out” but the market consists of a lot of people who stand to benefit from the charade continuing.
If you listen to Peter you will probably be correct eventually, after all, reserve currencies don’t last forever, but you might not benefit from it in your lifetime. Or you might.
What Can you Learn from Peter Schiff?
I certainly wouldn’t bet the farm on the US maintaining its reserve currency status for the next thirty years. I will remain thankful to Peter for opening eyes to some very real risks the US and the dollar face. But I will never be happy that I missed out on a 100% return if I hadn’t been invested with his firm from 2014-2020. He is not the person I will be going to to figure out how to grow and protect my wealth.
The answer is to take a more diversified approach and to keep your costs down. You can own foreign stocks through a low cost Vanguard mutual fund. Most large non-US companies are listed on US exchanges anyway. Most US companies have large foreign components for their business. When you invest in large US stocks, you are also investing in their non-US sales.
I think owning 5-10% of your liquid net worth in gold and silver is important. I think if you have some extra money to speculate on with cryptocurrencies that could also result in some outsized returns. I think owning hard assets like real estate and yes even some gold and silver is important.
But thinking there is some impending dollar collapse looming on the corner doesn’t do any good. It certainly hasn’t for the past 12 years.
I’ve punched a lot of keys on the ‘ole qwerty debating the merits of cryptocurrency versus gold and precious metals. But when all is said and done, gold has gone up very little while cryptocurrencies have gone to the moon. I was reminiscing on some old articles and I came across “No, Even with ETH at $2 Gazzillion, Ethereum Cloud Mining Isn’t Profitable” and I’m reminded that at one point I could have bought 62 Ether (ETH) for $561. ETH was trading at $9 per coin back then. As of writing ETH is trading at $2,455.48, so those 62 ETH would be up 27,183.1% to over $152,000 in about 4 years or so. Not bad.
I remember reading about the Ethereum network before it even launched. Based on my philosophical musings of money I thought it would important for a cryptocurrency to have non-monetary use in order to be valued over the long term and not just be a speculative fad. The ability for Ethereum to support DApps in addition to “just” being a currency checked boxes and so I chose to buy some ETH. At one point I probably owned 50-60 ETH.
EOS Is Superior to Ethereum based on Several Metrics
Of course the Ethereum network was at that time, like it is now, relatively slow as highlighted by “Cryptokitties” one of the distributed apps built on Ethereum that caused the network to grind to a proverbial halt. To date the most transactions per second processed by the Ethereum network is 19. I decided to sell ETH and instead placed my cap at EOS. EOS was labeled an Ethereum killer at one point and some people said that EOS stands for “Ethereum on Steroids.” Of course this was all before Ethereum went to “the moon.”
EOS uses proof of stake (instead of Ethereum and Bitcoin’s energy intensive and slow proof of work) and has handled up 9,565 transactions per second. In my view, assessing the EOS network and Ethereum network, EOS is superior.
However the market disagrees.
The market capitalization of EOS is $5.9 billion, the market cap of ETH is $285 billion. So clearly the market favors Ethereum.
For a long time I didn’t think this market cap was in any way justified. However, because of Ethereum 2.0 and with Ethereum down 36% from the highs, I’ve decided to buy some ETH.
The “Best” Technology Doesn’t Always Win
It is hard for me not to think that the better technology won’t win out in the medium term. However, this often isn’t the case. Good technology is important, but there is name recognition, brand, leadership and the network effect, which I’ve realized I tend to discount too much.
Apple in the 90s is a great example. Macs at that time were considered to be higher quality, more innovative and easy to use. However, a lot of people used Windows based PCs at work and wanted to use what they were familiar with at home, PCs were less expensive, and more people used Windows in general. So people chose Windows and Microsoft had a larger market share as a result. There were certainly rational reasons for choosing Microsoft Windows/PCs over Apple/Macs even though a strong case could be made for superior Apple technology.
Apple was able to overcome this in the early 2000s and onward but that is a topic for another article.
EOS Has a Likability Problem
A lot of developers are interested in and devote time to Ethereum, a lot of the cryptocurrency community was and is pro Bitcoin and pro Ethereum. Ethereum was sometimes thought of as “Silver to Bitcoin being Gold.” Ethereum entered the scene in a much more diplomatic way.
The technological founder of EOS, Dan Larimer, referred to proof of work as a technological dead end, was more abrasive and alienated more people. There were also issues, perceived and otherwise, that EOS is not in fact very decentralized. EOS had a market cap in excess of $16 billion in April of 2018 but has never recovered these highs.
That is was makes the excitement about Ethereum 2.0 so interesting. EOS can already do a lot of what Ethereum 2.0 is promising to be able to do in the future. But Ethereum has people like Mark Cuban talking about it, it has more name recognition and more development interest. The cryptocurrency community, and people outside the space know about and accept Ethereum in a way other cryptocurrencies can’t match.
Ethereum Has More DAapps
According to State of the DApps, there are 2,782DApps on Ethereum and only 328 on EOS. However, EOS has handled 353.18k in the last 24 hours (as of writing this article) compared to 201.92k for Ethereum. So despite the technological limitations in transaction count and less energy efficient consensus model, developers choose Ethereum on which to build their DApps.
Ethereum Has More Name Recognition
Most people have heard of Bitcoin by now. I doubt many people on the street will have heard of EOS or associate it with the cryptocurrency. Ethereum is much closer to Bitcoin in terms of name recognition. I decided to test my theory using google search trends as a proxy and found that searches for “ETH price” far outstrip searches for “EOS price”. This is an admittedly flawed approach as EOS could also refer to the Canon Cameras, the “Entrepreneurial Operating System” and there is even an EOS fitness. I don’t think Ethereum shares it’s name the way EOS does. But if anything this inflates the number of searches for EOS price beyond those searching for the cryptocurrency.
Ethereum 2.0 Should Address Many of the Performance Issues
Ethereum 2.0 should address many of the performance issues that caused me to favor EOS over ETH in the first place. Add that to the tailwinds it already has and it could be a great speculation. I’ve decided to buy some ETH and plan to continue to average in on pullbacks. You probably shouldn’t listen to me, this isn’t investment advice and I’ve had a bad trading track record when it comes to crypto, particularly on the sell side.
Some people who are anti-bitcoin will argue that the government will shut down bitcoin. Other pro-Bitcoin folks argue that is impossible. Of course these arguments could (and have been) made in a more subtle fashion, but those are the two camps when painted in broad strokes.
Governments Could Pass Legislation Making Bitcoin Illegal
The governments could easily pass legislation to make owning and mining Bitcoin illegal.
The US government has made basic things like alcohol and gold illegal in the past. Drugs like marijuana are still illegal at the Federal level in the US. So the US government has made various things it doesn’t like illegal in the past.
Making highly demanded products illegal doesn’t eliminate them. The black market steps in to supply the demand.
The war on drugs has been a colossal failure. Despite being illegal people with the limited resources and influence of your average high school student can still get marijuana. People in prison can and do still get illegal drugs. If the government can’t keep drugs out of prisons they will never keep them out of the country.
Even the most ardent statist would probably admit that alcohol prohibition was unsuccessful.
I’m not actually certain how successful the banning of gold was as a result of President FDR’s tyrannical Executive Order 6102, which attempted “Forbidding the Hoarding of Gold Coin, Gold Bullion and Gold Certificates”. It would be hard to judge because it would require people coming forward and admitting they violated an executive order for over 35 years. But I suspect there was significant non-compliance.
So prohibition of various things hasn’t worked well in the past. As long as there is demand for something a certain percentage of people who demand it will find a way to get it.
Despite the questionable efficacy of legislation governments certainly could make Bitcoin illegal. But would they?
The US Government will go after BTC if it is deemed a threat to the Dollar
The United States government could certainly pass legislation to make Bitcoin illegal. But I think they would only do this if BTC was viewed as a serious threat to the dollar.
The US government has (according to some) invaded countries and destroyed them for planning go off the petro-dollar and adopt a gold backed currency.
The ability of the US government to borrow in dollars and then create new deposits with which to pay back those dollars is a huge benefit and source of power. This is enabled (without rampant rising prices) because the US dollar is used for trade throughout the world and is held by foreign entities and governments as a reserve currency.
Bitcoin isn’t really a threat to the dollar right now. Sending BTC is slow, expensive, and Bitcoin can only handle about 20,000 transactions per hour. Unless this changes I don’t think Bitcoin will ever be used as money. If trade starts to happen in Bitcoin or oil begins to be priced in Bitcoin then the US government will likely view Bitcoin as a threat.
But right now Bitcoin has several advantages for the government. First, it is highly traceable since all Bitcoin transactions are public. I’m sure tying a person to a Bitcoin address is difficult but it can and has been done. Secondly, the meteoric rise in price and volume of trading means lots of taxable transactions and revenue for the IRS.
But if Bitcoin was a serious threat to the dollar the US government would try to stop it. The first step might be taxing and regulating it significantly. The United States is in the early stages of this first step. The next step might be making it illegal. A final step would be attacking it directly.
But making goods or actions illegal doesn’t make them go away, it just drives that activity underground. That doesn’t mean that government edicts banning something don’t have implications or impacts.
What might be the impacts of making cryptocurrencies like Bitcoin illegal?
The Impacts of Illegal Bitcoin
US Based Exchanges Would Disappear
Coinbase.com is the largest US-based cryptocurrency exchange. It would no longer exist or it would be forced to relocate to a jurisdiction where Bitcoin was legal and they would likely ban and block US customers. Current assets could be seized or forced to be turned over to the government.
Onramps and Offramps would be Reduced
There is a need for onramps and offramps between Bitcoin, government issued currency and real goods and services. Illegal Bitcoin would make it harder to convert Bitcoin and other cryptocurrencies from fiat and vice versa. Die hard Bitcoin enthusiasts might dream of a world in which transactions are conducted in Bitcoin and government fiat is not involved, but based on the current Bitcoin protocol that isn’t possible.
Additional technology like wrapped Bitcoin, which does exist, would be needed to make Bitcoin viable as money. However, this erodes some of the decentralized benefits of Bitcoin, as it requires a trusted custodian. But I digress.
Banks would refuse transfer fiat to known cryptocurrency exchanges. You wouldn’t be able to link your bank account to Coinbase for example. You wouldn’t be able to easily sell cryptocurrencies and transfer the proceeds back into your bank.
Apple and Google would ban all cryptocurrency related apps on their stores.
In order to get Bitcoin you would need to mine it, or find someone who already holds Bitcoin willing to exchange it for something you have. So there would need to be “back alley” exchanges. If one of these deals were to go south, there would be no legal recourse. Of course if you’re exchanging Bitcoin for goods and services with a friend or relative it might work out just fine.
The free market could step in to provide escrow services and some of the illegal exchanges might be trustworthy. Doubtless there would be more sketchy “pirate” exchanges but those might be the target of denial of service attacks conducted by governments. Trading on a “pirate” exchange would require trust in people willing to break the law. The number of exchanges that disappear with client funds or get hacked would likely go up.
Assembly, importing, selling and possession of Bitcoin ASIC Hardware would be Illegal
You can’t successfully mine bitcoin using a basic PC anymore. You also can’t successfully mine bitcoin using even a computer equipped with advanced graphics cards. Mining bitcoin requires ASIC (Application-specific integrated circuit) hardware and a lot of electricity. Owning or possessing this hardware would be made illegal.
People suspected of mining Bitcoins could also have their power usage monitored, similar to how law enforcement will look at the electricity consumption and temperature of houses to try to determine if marijuana is being grown indoors.
I’m sure this would not stop some people from illegally mining Bitcoin, but I do believe it would reduce the amount of miners in the US.
Larger Corporations Would Not Own Bitcoin
Tesla announced they purchased $1.5 Billion in Bitcoin back in January of 2021. This would be illegal and so a company like Tesla would almost certainly not do it. Companies found in violation would be fined, have the Bitcoins seized or would be prevented from doing business in the United States, one of the largest economies in the world. The US could also bully non-US companies into shunning bitcoin like they do with foreign companies who try to transact with countries the US has sanctioned.
ISPs Might be Required to Block Access to Bitcoin related Sites
This would be an inconvenience and would only stop more casual users. VPNs could be used to get around such censorship and so I don’t think effort to stop Bitcoin would be very effective. However, it would make it somewhat more difficult or slower to connect to nodes, or transact in Bitcoin. Barriers to entry, particularly for less tech savvy users, would be negative for Bitcoin.
Bitcoin addresses would be tracked
I know governments already track Bitcoin wallet addresses used or suspected of being used for illegal activity. Bitcoin is pseudonymous and somewhat decentralized but it isn’t anonymous. All Bitcoin transactions are available for anyone to view.
Government agencies in charge of enforcing a Bitcoin ban would no doubt spend a lot of time tracing large Bitcoin transactions on the network and attempting to determine who controls those addresses.
This is a complicated effort but given enough time and resources it could be done. This would be a challenging effort no doubt and the Bitcoin community would likely try to do coin mixing or work to make the network anonymous.
So those are some possible results I see unfolding if Bitcoin was made illegal. But just making Bitcoin illegal is only a phase 2 approach. Government could go even further and attempt to attack Bitcoin directly.
The Impacts of a Bitcoin Attack
A 51% Attack
If an entity or group controls 51% or more of the mining/hashing power of a network like Bitcoin they could prevent new transactions from taking place or being confirmed, they could mine empty blocks in which no transactions were processed or they could double spend their Bitcoins.
The US Government is willing to spend tens of billions of dollars on the war on drugs each year. They are definitely willing to spend more than that to defend US dollar hegemony if Bitcoin was a threat.
The NSA could build bitcoin mining data centers and launch a 51% attack on the Bitcoin network and they would be willing to spend Billions of dollars to do so. This would be challenging as it would require ASIC hardware and a lot of electricity.
According to this website an attack would cost $716,072 per hour. This would be about $6.2 billion per year.
The US government spent $29.4 billion on the war on drugs in 2018, so $6.2 billion is chump change. The attack would not need to be done for an entire year. They could do the attack for a few months, or a few hours each day, just to disrupt the network and cause chaos and tank the price.
A 51% Attack by the Chinese Communist Party (CCP)
Would the United States devote the money to launching a 51% attack on Bitcoin? I think so if it was a threat to the dollar. But I don’t know how likely that is.
A 51% attack on the Bitcoin network is perhaps most likely to come from the Chinese Communist Party (CCP). The hashing power and cheap electricity are already in China: 65% of Global Bitcoin Hashrate is Concentrated in China. Even if that number overestimates Chinese hashing power by 14% it is sill enough. An October 2018 study wrote, “As of June 2018, over 80% of Bitcoin mining is performed by six mining pools, and five of those six pools are managed by individuals or organizations located in China.”
A more recent estimate predicts 65% of the Bitcoin Hashrate is concentrated in China. By my own determination of country designation, in conjunction with data from https://www.blockchain.com/charts/pools, Chinese affiliated mining pools account for at least 55% but perhaps up to 62.5% of the last 587 blocks mined (as of 28 February 2021).
That doesn’t sound very decentralized.
The Chinese Communist Party (CCP) could infiltrate the Bitcoin mining organizations in their country in a more clandestine manner or they could seize the Bitcoin hashing power directly. They wouldn’t need to build a new data center or account for new electricity needs, the hashing power and electricity generation is already there.
Electricity in China is very inexpensive compared to nearly all the rest of the world.
The Chinese Communist Party has no problem using cheap, dirty coal to generate 68% of its electricity. As an aside China accounts for 30% of global CO2 emissions. However, some of the power also comes from the abundant and inexpensive hydroelectric power found in certain Chinese regions.
What would motivate the CCP to attack Bitcoin? If it was a threat to their power in some way. Perhaps if it was being used to circumvent their taxes, regulations, capital controls or is just viewed as a threat to their centralized communist ideology. If enough organizations in the west held Bitcoin it might behoove the CCP to destabilize BTC to cause economic disruption for their enemies.
I’m sure the Bitcoin community would come together to try to work around this attack, but it could be highly disruptive. Such an attack doesn’t need to destroy the Bitcoin network forever, it just needs to shake the confidence of enough Bitcoin holders to get them to sell and dissuade enough would be Bitcoin buyers and thus tank the price.
I Don’t think the Government Can Kill Bitcoin But It Can Significantly Maim It
I don’t see much motivation for the US government to make Bitcoin illegal as it isn’t a threat to the dollar. But if it did and they made BTC illegal it would probably reduce the number Bitcoin users by taking away onramps and offramps and prosecuting people found in violation of the law.
Like the war on drugs or prohibition of alcohol I don’t think the government can kill bitcoin just by making it illegal. Through an attack government could cripple Bitcoin and leave it in a semi-comatose state in an out of the way convalescent facility where only a few devoted friends come to visit.
The CCP could be in the best position to successfully attack bitcoin due to their inexpensive electricity and that the majority of hashing power already existing within their jurisdiction.
At a minimum such an attack on Bitcoin would surely result in a price collapse. Would Bitcoin be able to recover? I don’t know. Bitcoin has survived various other incidents and selloffs only to make new highs. So far the HODLers have been well rewarded. But understanding the risks posed by a high concentration of Bitcoin miners in China is important for those who own Bitcoin.
2020 has been a good year for gold. Gold is up almost 18.93% in 2020 compared to the S&P 500 which is only up 12.42%. A new high of $2,089 was made in August. This took out the previous high of $1,923 that was made back in September of 2011.
Over the past five years gold has kept decent pace with the S&P 500. Although the S&P 500 has outperformed gold during that time 77.94% to 53.12%, there have been years in which gold outperformed. In 2018 gold was down 2.61% and the S&P 500 was down 7%. And so far in 2020 (as mentioned above) gold is up 18.93% compared to the S&P 500 being up 12.42%.
S&P 500 shown in purple above, compared with gold
It’s was a tough road to get to that new high. Five years ago gold was at a low of $1,045, in November of 2015 to be more precise.
I started buying gold in December of 2012 when gold was trading north of $1,660. I dollar cost averaged in and even bought some gold when it was trading around $1,100.
Gold since 2010. The green bar is the $1,790 price level
Gold is trading at about $1,815 as I write this. I believe this is a key price. While reading technicals could be akin to tea leaves, it is one of the few tools we have when evaluating gold price.
As you can see from the chart below, within about $10-20 of $1,800 there was resistance in 2011 and twice in 2012 when gold tried to rally but sold off again. In other words, buyers would bid the price of gold up to around the $1,800 level, but then sellers would come in and drive the price back down.
Fast forward to 2020. In March when things were going crazy everyone was selling. Gold went down along with stocks. But then around the $1,500 level buyers outnumbered sellers and gold proceeded to rally up to it’s latest high of $2,089.
During this time there was resistance more around the $1,750 level. It touched $1,800 in April and then in June. But instead of selling off considerably, it just bumped around between roughly $1,700 and $1,800 before a flurry of buyers sent the price to the new high in the last two weeks of July.
The move in July was fairly rapid and aggressive, moving nearly $300 in just a few of weeks. Since then gold has been trending downwards. Buyers seem rather squeamish at these prices and gold has sold off since August and currently is hovering around $1,815.
An analogy for markets and price movement are lungs. You can’t breath in (buying) or out (selling) constantly, you need to exhale in order to breathe more. With the rapid price rise we’ve seen in 2020, it makes sense gold would sell off and exhale some.
The question is wether gold will continue to rise in price in the remaining weeks of 2020 and beyond or if it will move down or sideways.
Future Price Guesses
Gold, like any other asset, can either move up down or sideways in price.
It has been trending down over the past few months. At the $1,800 level the resistance encountered in 2011 and 2012 could serve as support and gold could consolidate in price here and make another run at a new high.
Based on the nice rally up to $1,815 that could be the more likely case.
If gold does go back down to $1,750 or lower I think it will continue to go lower until there is another catalyst. I doubt gold would go lower than $1,450.
As I’ll discuss more in the last section, I think a Biden-Harris administration coupled with COVID-19 should be a great environment for gold.
Bitcoin Makes New Highs
Bitcoin has made new highs of $19,625 in November of 2020, taking out the previous high of $19,497 back in December of 2017. It is certainly possible that Bitcoin is taking some of the bidding away from gold as a save haven asset.
Opting Out
Alternative assets like gold are a way of opting out of the traditional financial system. Gold is also often considered an inflation hedge and safe haven asset.
I think it is more likely there will be a Biden-Harris administration in the White House. I think lockdowns are more likely throughout the United States and the world. Governments are paying people to stay home and seem intent on preventing even one more COVID-19 death regardless of other deaths or consequences.
I don’t think there is enough debate or discussion on what the consequences of the lockdowns are or if they are even effective.
Small businesses going out of business, unemployment rising, and other byproducts of lockdowns such as increased depression, suicide and substance abuse should be weighed against the effectiveness and results of lockdowns.
Regardless of their efficacy and consequences, lockdowns means more spending and stimulus. Not only that, but fewer people working means fewer goods and services that are available to buy.
I believe assets like gold and silver will do well in this environment and are an important part of my diversified investment holdings. I think it is important to have 10-20% of my portfolio in precious metals like gold and silver.
Disclaimer: None of the above is investment, health or legal advice.
Since no one from BitBays.com or MixCoins.com support is returning my emails and their address in London is a real estate company, I have no choice but to conclude that MixCoins is a scam and BitBays was a scam. If anyone from MixCoins/BitBays can come forward and explain why it isn’t a scam and provide me with access to the Bitcoins I have (or had) on there site, I am willing to make other considerations. As of now I have to conclude that the fraction of a BTC I had on BitBays is lost.
Unfortunately I wrote about BitBays and later Mixcoins.com previously and put some Bitcoin on their site to take advantage of their arbitrage fund. I first personally deposited Bitcoins there in July of 2015 and was able to successfully deposit and withdraw. My last successful withdraw was in April of 2017.
On September 4 of 2017 I received the following e-mail:
In hindsight this was a big warning sign. Around this time MixCoins also implemented a Know Your Customer or “KYC” requirement. However, since I was still able to login using my existing username and password to MixCoins.com I didn’t think too much of it.
With the more recent rise in Bitcoin this year, I decided to look into this more. I contacted MixCoins.com about doing KYC and received no response after several weeks of trying. At this point the alarm bells were ringing.
I have contacted Mike Gropp on LinkedIn. On his profile he is the “Co-Found & Chief Compliance Officer” of Bitbays from July of 2014 – July of 2016. I contacted him in June of 2020 and he advised he hasn’t “been involved in BitBays/MixCoins for years” and that he isn’t “sure what they are up to these days.”
He provided me with an email address, which I contacted, but received no response as of writing this.
So having been burned by BitBays, what lessons can I learn?
1. If It seems to Good to be true, do your Due Diligence
I think the old adage “if it seems too good to be true then it is” is helpful, but it could cause you miss out on opportunities. I was skeptical of the arbitrage fund on BitBays that claimed to pay out 10.96-12.96%. However, it made sense to me and in my testing it worked. I also messaged back and forth with one of the purported co-founders, Mike Gropp. BitBays was also featured on Forbes’ website.
But despite my reasons for believing that BitBays.com were legitimate, I didn’t do enough due diligence to prevent me from getting scammed and losing the Bitcoins I left on their site.
2. Stay diversified
One thing I did reasonably well is I didn’t keep all my BitCoins at BitBays. I kept my position there small. While it still stings to lose some BTC, especially with it making new highs, it could have been much worse.
3. A trusted custodian is worth a lot
There are other more established Bitcoin exchanges like Coinbase that don’t offer an arbitrage fund. If you’re going to entrust an organization with money you need to ensure they are worthy of trust.
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