19 January 2022

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Gold and Bitcoin

Author: Luigi Campopiano

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Gold and Bitcoin, The two "reserves of value," are united by too abundant liquidity in the market not to be good for both. So why is investing in these two asset classes a winning choice? What characteristics unite them, and what are their respective stock market prospects? Before starting the discussion, however, we must ask ourselves how it is possible that the two goods can continuously increase in price. An asset does not have an intrinsic value because it is the people who arbitrarily quantify its "price". However, there are goods and goods: gold has shown stability for millennia. So what's the secret? Gold has been able to maintain its value over time by specific characteristics that have led it to be conceived as a medium of exchange:

• Fractionability;

• Portability;

• Recognizability;

• Not falsifiable;

• Rarity (about 180 thousand tons of gold have been extracted from the subsoil that delimits the offer). 

Bitcoin has more or less the same characteristics: the offer is delimited by an algorithm. The emission threshold has been established at 21 million bitcoins. For an exception to this forecast, it would take all the developers and miners around the world (this hypothesis is impossible because the developers have no interest in increasing the offer. There would be a price drop because the global character of the community is not subject to any single legislation).

Another important element supports the respective valuations and guarantees a further upward push of these assets: the excess money supply in circulation (to face Covid, the monetary base has exploded, and gold has recovered its monetary function). This is happening in an indebted world, which means that shortly we could find ourselves with inflation and negative rates (inflation would be a balance sheet on current accounts, but also the only solution to get out of a world so highly indebted: better a long depletion of savings compared to a default). In such a context, the optimal strategy for small savers would be to remain invested in liquidity but real assets such as bitcoin or gold.

Furthermore, gold and bitcoin are two undercapitalized asset classes: gold capitalizes about 10 trillion and bitcoin about a trillion. In comparison, the aggregate debt worldwide stands at 300 trillion (2 asset classes so much undercapitalized compared to the tide of money in circulation they are not competing with each other, but both have large margins for upside). In this context, it cannot be ruled out that the price of bitcoin may touch much higher figures without creating problems for the market.

For such a rise to occur, against a fixed supply, a substantial increase in demand is necessary. Suppose this is difficult for gold (the potential and real demand are almost identical). In that case, it is less so for bitcoin (one in three people say they are interested in investing in bitcoin, but to date, only 1% of the population owns bitcoin: in other words, there is a high margin for upside, facilitated by the innovation and maturation of the market. Furthermore, we are now witnessing an increasingly widespread interest from financial institutions and large companies (or institutional demand).

So is it time to include these asset classes in the portfolio? If you are aware of the risks and how much you are willing to lose, the answer is yes. Investing 1% of your wealth in bitcoin can lead to two extreme outcomes: either you lose everything without causing a drama, or if it goes very well, which is possible given its high volatility and the initial phase of its cycle. Which asset has this upside potential?

In light of a not very attractive bond and relatively expensive equity, some experts in the sector say that a good portfolio could be made up of almost 50% (I, personally, I would not go beyond 10-15%) of the gold pairing. bitcoin, with the balance of power in favor of the former due to a much greater stability.