Gold or Bitcoin: What’s the Best Investment?

by JDH on December 9, 2017

Yup, I did it.  I used the words “bitcoin” and “investment” in the same sentence.

I do not think of Bitcoin as an investment.  I think of it as a speculation.  Or gambling.  However, there is no doubt that we all should have put all of our money in Bitcoin a year ago, because Bitcoin was the best “investment” of 2017 (unless it has crashed to zero by the time you read this, in which case, never mind).

Is gold an investment?  Some would say “no”, because it generates no income, and for long periods generates no capital gains.  It is, however, a “store of value”, in that what you could buy with an ounce of gold in the past is about what you could buy with it today.  (The standard example is that a hundred years ago a good man’s suit cost one ounce of gold, and it’s about the same today.  The counter-example is that the dollar value of a good man’s suit is completely different than it was 100 years ago, because a dollar is not a good store of value).

So if I had $10,000 to invest today, should I put it in gold, or Bitcoin (if I only had those two choices, and I had to pick one of them).

The answer is that today I would probably leave the money in cash, but it’s an interesting question.  The problem is that the chart of gold looks terrible.

To make it look even more terrible, here is the chart of NUGT – Direxion Daily Gold Miners Bull 3x Shares NYSE + BATS, a proxy for gold, but more leveraged (3 times leveraged, so the swings are more magnified).

NUGT is trading at around $25, which is about where it was trading last December.  It then doubled in value to over $50 in February, but then, as you can see from the chart, it’s been a series of lower highs, and lower lows, so it is now back to where it ended last year.

Not good.

Do you want to buy something in a year long down-trend?

Probably not.

The alternate viewpoint is that gold is traditionally weak late in the year, and is then strong to start the year.

That’s true.

If we look at the same chart over a two year period, buying NUGT at the end of December is a solid strategy.  In December 2015 NUGT was around $20, and was over $140 by the summer.  It closed 2016 around $20, and was $50 in February.

So perhaps the low value in December is actually a buying opportunity.

Perhaps, but I would prefer not to buy until it is closer to the bottom.  The bottom last December was around $22, so let’s see if $22 holds, and if so, that may be the place to enter the market.

Bitcoin

So what about Bitcoin?

There is no point in me displaying a chart of Bitcoin, because if you read this more than 5 minutes after I post it, the chart will be so out of date as to be meaningless.

I can tell you that on December 3 Bitcoin was around $10,630, and it touched $19,680 on December 7, and on December 8 you could buy a coin for $13,770.  That’s volatility.

I like the concept of crypto-currencies.  I like that the government can’t print more and create money to pay for wars and whatever else government’s do that I don’t like.  I am satisfied that, in general, cryptos cannot be hacked.

NOTE: There is a difference between the crypto currency, like Bitcoin, and the exchange on which you can trade them, like Quadriga or Coinbase.  An exchange can be hacked, so if you are storing your coins at an exchange, they could be stolen.  That’s why, if you choose to play this game, you want to store your coins securely, probably in a wallet, such as those made by Ledger or other companies.  I do not recommend or endorse any exchange or wallet, so do your own due diligence.

What makes me nervous about Bitcoin is that it is not scale-able.  The Bitcoin blockchain is capable of processing a maximum of 7 transactions per second.  Over the Christmas season Visa will process around 60,000 transactions per second.  Clearly Bitcoin in it’s current form will never replace Visa.  Note that I said “in it’s current form”.  It’s possible, perhaps likely, that Bitcoin will do a “hard fork” and implement improvements, but at the moment Bitcoin is not the answer to all of our problems.  Perhaps another crypto will be.

Ethereum shows promise, and it is the second biggest crypto by market cap (at the moment).  Perhaps it will be the crypto that changes the world.

So here’s my advice: do not plan to buy Bitcoin and “put it away” for a few years when one coin will be worth $100,000.  It may be.  Or it may be worth zero.  If you want to play it, get it, and get out.

Obviously the volatility is great if you want to speculate.  Wait for Bitcoin to drop by 30%, which it seems to do every day or two, and buy.  When it’s up 100%, sell.  That strategy would have worked great last week.  (Past results are no guarantee of future performance, so I’m not suggesting that 100% weekly swings will be the norm…..).

My plan?

I’m dabbling.  I own a very small quantity of Bitcoin and Ethereum.  A very small quantity.  If they both go to zero tomorrow, I won’t notice; that small.  I bought some because I need some “skin in the game” to understand how it works, so that’s how I will watch and learn.

And there is a lot to learn.

The US Dollar

Final point: Assuming the Trump Tax Plan becomes law, it is likely that a lot of money, currently held offshore, will be repatriated to the USA.  For example, Apple has $252 billion stashed outside of the USA.  To bring it back today would cost 35%, or $88 billion.  Under the new law the tax rate drops to 14.5%, for a savings of $47 billion.  It is therefore likely that big companies with money offshore will bring at least some of it back.

The government would like them to use it to create jobs.  Most likely they will do share buybacks and pay it out as dividends, but regardless, some of the money returns.

The pertinent question: what will that do to the US Dollar?

My guess is that a big demand for dollars will increase the value of the US Dollar, perhaps significantly.  That’s not good for gold, since they often, but not always, move inversely to one another.  Another reason to lessen your exposure to gold.

Perhaps some of those dollars will find their way to Bitcoin.  We shall see.

Stay tuned, and thanks for reading.  See you next week.