OK, lets jump back into the Bitcoin/Gold discussions and get some strong opinions. Here is a very good piece done by none other than the CME Group that makes some extremely good points. Of course since they are expected to launch bitcoin futures shortly and they already trade gold contracts (hmmmm, digitized gold maybe too??) they are a bit biased. BUT, biased or not, when the "Merc" speaks ya gotta pay attention. Oh yeah, I know the "FAANG" stocks are hot (and risk-less??) but the history of being long gold and now bitcoin make the equities look........well, yawn. Great read.
(Bill Taylor/CEO)
At a Glance
- Bitcoin has grown 6 million percent since its launch
- The digital currency could still be undervalued
An inherent tension exists between the two major purposes of money. Currencies that are perceived as great stores of value, such as gold and bitcoin, make for poor mediums of exchange. By contrast, currencies that are effective mediums of exchange, such as fiat currencies used the world over, can make for dubious stores of value. Where a currency falls on the store of value versus medium of exchange spectrum influences its usefulness as a unit of account and a standard of deferred payment.
Supply Scarcity and Stores of Value
As stores of value, many investors perceive gold and, more recently, bitcoin as second to none. Since 1971, gold has appreciated from $35 per ounce to around $1,300 at the time of this writing, a gain of over 3,500 percent. Bitcoins have done even better. On July 19, 2010, a bitcoin was worth $0.08. At the time of this writing, it’s priced close to $5,300 per bitcoin, a gain of over 6,000,000 percent in seven years. Not bad!
Whether gold and bitcoin really are stores of value is not universally accepted. Viewed from a fiat currency perspective, such as that of the U.S. dollar, bitcoin and gold are, to say the least, not without risk. Over the past 12 months, the annualized standard deviation of gold has been 12 percent. Gold had a 70 percent drawdown between 1980 and 1998. Compared to bitcoin, the gold market looks sleepy. Bitcoin owners experienced a 60 percent annualized standard deviation over the past 12 months and in the past, it has achieved a mind-boggling 175 percent annualized risk. Moreover, in its short life, it has already had drawdowns of 93 percent and 84 percent.
Drawdowns of such magnitude do sound crazy yet investors still allocate funds to other markets which have experienced large drawdowns. The U.S. equity market, which experienced an 89 percent drawdown between 1929 and 1933, from which it took until 1954 to recover. Since then, it has experienced a 47 percent drawdown in 1973-74, a 50 percent drawdown in 2000-2002 and a 60 percent drawdown from October 2007 to March 2009. Crude oil prices are currently 67 percent off their 2008 highs. The difference being, of course, that few investors would argue that stocks and crude oil are stores of value. Rather, investors perceive them as being risky investments.
Full Story at Openmarkets.cmegroup.com