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Gold v crypto. The end game

There was a time, not that long ago, when gold was said to be facing a challenge as a reserve currency from Bitcoin and other cryptocurrencies. Not today.
Gold v crypto. The end game Gold v crypto. The end game Gold v crypto. The end game Gold v crypto. The end game Gold v crypto. The end game

Tim Treadgold

 

Last week's crypto collapse, which is starting to develop unpleasant legal and financial features (think a visit from the tax man) could be the beginning of the end for an asset class which has more in common with casino chips than any genuine investment.

Why crypto suddenly crumbled has not been fully explained, and might never be understood, but that's in keeping with a creation which came from nowhere and will leave nothing when it goes. Dust to dust and ashes to ashes.

True believers in the concept of a universal currency not controlled by a government will be devastated by what's happening in their crypto world which absorbed billions of dollars, made a few people rich, and a lot poorer.

What the unfortunates stuck in crypto are now discovering is that everything about it is false, starting with the nonsense surrounding its invention by an unnamed computer programmer and the description of the product as coins, which they're not.

Perhaps the most annoying aspect of cryptocurrencies was the claim that they shared gold's qualities as a store of portable value, skipping lightly around the fact that gold is a hard physical asset with multiple uses whereas crypto is a piece of computer code stored on a server somewhere, just don't ask where.

What happened last week with the failure of FTX, a crypto exchange, was both predictable and inevitable from the day U.S. interest rates started to rise and realistic values returned to all asset classes.

Until the rate normalisation process started it was difficult to price the risk in crypto because the starting point was close to zero, the cost of borrowing funds to trade in one of the thousands of cryptocurrencies floating around the internet.

But as the cost of money rose the game of gambling in crypto, which is essentially about trying to find buyer willing to pay more than you did, took a nasty turn because traders suddenly realised that there were real costs to be covered.

What's also being discovered is that there are other costs in a totally unregulated market, including fraud and theft, problems also encountered by investors in gold, though it's easier to recover a bar of gold than a line of computer code.

Comparisons between crypto and gold invariably skipped lightly around the issue of gold's 5000 year record of trust in its reputation as a store of value, as well as being an admired body adornment in many cultures, something Bitcoin could never do as it doesn't actually exist.

The spectacular rise in Bitcoin was as much to do with ultra-cheap money as it was with "idle hands" theory because it coincided with the Covid-19 pandemic which confined people to their homes where they developed unhealthy habits with gambling one of them.

From around US$10,000 a coin in early 2020 the price of a Bitcoin went vertical, reaching $64,000 late last year, up 540% in roughly 21 months (or 25.7% a month) in what now looks like an electronic version of tulip-mania of 17th century Holland, or the South Sea Bubble of London in the same century.

As crypto rose so did the comparisons with gold even though the two started to part company around this time last year with gold largely holding its ground while Bitcoin plummeted.

From its peak $64,000 almost exactly 12-months ago Bitcoin has fallen by $48,000 (75%) to around $16,000 today, with $5000 of the fall coming in the last two weeks as the depths of the FTX crisis become a little clear, including allegations of $515 million stolen from crypto accounts.

Gold, as interest rates started to normalise, has also been sold down, shedding $305/oz (14.7%) an ounce from its early Covid peak in April 2020, of $2067/oz to latest trades at $1762/oz - though the recent trend is up whereas Bitcoin remains down.

Crypto zealots will not give up without a fight with one recent report on the CoinTelegraph website claiming in a headline that: "Gold v Bitcoin correlation signals Bitcoin becoming safe haven: BofA".

The BofA is shorthand for Bank of America which CoinTelegraph claims carried a report which included the comment that: "Bitcoin is a fixed supply asset that may eventually become an inflation hedge".

That might happen, but only after the bankruptcy of FTX is resolved, missing funds traced, unauthorized transactions investigated, and all suspicious activity explained.

Crypto investors, licking their wounds from the 75% fall in the value of their Bitcoins (and 95% in other make-believe currencies such as Solana) can also expect their tax returns to be closely examined if they traded profitably on the way up and now have losses to manage after the fall

Gold, meanwhile, is recovering thanks to the world's richest investors, central banks, continue to buy an asset they believe in while privately urging governments to kill the crypto craze. Which is what will happen next as crypto is regulated out of existence.

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