Having broken through $100,000, Bitcoin has garnered a lot of attention. Federal Reserve Chairman Jerome Powell recently said the cryptocurrency is "the same" as gold and neither is in competition with the U.S. dollar. In this episode of the Money Metals' Midweek Memo, host Mike Maharrey dissects Powell's assertions and explains why he's wrong on both counts.
A lot of people have said stories about Bitcoin. Mike shares one of his own to open the show.
"In about 2016, somebody paid me for some work in Bitcoin. One Bitcoin to be exact. At the time, it was worth about $400 or $450. Well, I needed a laptop. I found one used that would do the job for about $350. So, I cashed out the bitcoin and bought the laptop, leaving just a fraction of one Bitcoin. It’s hard to retell that story now that Bitcoin is around $100,000. Coulda, shoulda, woulda, right?"
With the recent bull run pushing Bitcoin above $100K the spotlight is once again shining on the cryptocurrency. Some people have even predicted Bitcoin will replace gold as a reserve asset and challenge the U.S. dollar. Mike says he doesn't think that's likely.
He points out that on Tuesday, Microsoft shareholders voted not to include Bitcoin on the company's balance sheet. Even before that, there was a sharp selloff on Monday. And while it remains unclear what exactly sparked it, Mike says the selloff underscores one of the issues with Bitcoin.
"It is extremely volatile."
But despite his doubts, Mike insists he's not "anti-Bitcoin."
"I like any kind of monetary competition. But I’m also wary of people who are all bitcoin all the time. I have heard of people putting their entire savings in Bitcoin. I don’t think that’s wise. I mean, I would never put ALL of my savings in anything. I’m a proponent of diversification."
He also explains some fundamental things about cryptocurrency that make him wary, including its dependence on the internet and electricity.
"But that said, I’m definitely not one of these guys who constantly downplays Bitcoin. The fact that I’d have $100,000 right now if I hadn’t cashed out in 2017 reveals that it has been a good investment."
Mike notes that with the Bitcoin surge, he's starting to hear people throwing around the "Bitcoin is digital gold" mantra.
"In fact, Federal Reserve Chairman Jerome Powell recently tried to lump the two together, and I want to take a little time to dissect what he said because I think it’s revealing on a lot of levels. I’ll give you the bottom line first – gold and bitcoin aren’t the same."
Mike lays out Powell's argument. The Fed chair claimed Bitcoin and gold are the same. He went on to call Bitcoin a "speculative asset" and insisted that it competes against gold - not the dollar.
"Let’s break down Powell’s comments and see how they stack up against reality."
First Mike concedes Powell is right when he says Bitcoin behaves like a speculative asset, noting that it correlates most closely with tech stocks. Meanwhile, its correlation with gold is close to zero.
He also emphasizes that Bitcoin is extremely volatile, while gold is not.
"But is Bitcoin 'just like gold?' That’s what Powell said. And the simple answer is no. In fact, when you think about what Powell said, his logic is internally incoherent. Rember, he said Bitcoin is a speculative asset. Gold is definitely NOT a speculative asset."
Gold is generally considered a store of value and a safe haven. Bitcoin could be considered a store of value, especially given inflation. But it is not a safe haven. In fact, it has historically performed poorly in that role.
"Again, I really want to drive this point home. Bitcoin and gold aren’t 'the same.' They are different assets that can both boost a diversified portfolio."
Keep in mind that Powell lumped gold and Bitcoin together to argue they aren't in competition with the dollar.
"But gold is clearly a competitor with the greenback because it is money, right? I don’t think that’s debatable. That means insofar as Bitcoin and gold are 'the same,' Bitcoin is competing with the dollar as well."
Mike points out that gold is money and has been for 5,000 years. That means it's competing with the dollar.
"Gold is literally replacing dollars as a reserve asset. If that’s not competition, well, I don’t know what is."
Mike then shows that Bitcoin can also be considered a currency. And both Bitcoin and gold share a commonality that makes them both superior to fiat dollars -- they can't be printed by a central bank.
"The Federal Reserve can create new dollars at will. This money creation (inflation) supports the U.S. government’s prolific borrowing and spending. In effect, the Fed is the engine that drives the massive federal government. The constant money printing necessary to sustain government spending is precisely why the dollar continues to lose purchasing power month after month. This is impossible with both gold and Bitcoin. The creation of new Bitcoin is limited by its algorithm, and the creation of gold is limited by nature. The restraint gold put on money creation was precisely why the U.S. government went off the gold standard."
So, Powell is wrong on both counts. Gold and Bitcoin aren't the same. But they are both in competition with and superior to the dollar.
"Given the superiority of both Bitcoin and gold as money, it’s no wonder Powell wants to downplay this competition."
Mike wraps up the show by explaining how investors can use gold and silver to protect their Bitcoin gains.
"Money Metals’ customers can also swap Bitcoin (and other crypto coins) for gold and silver to be stored by the Money Metals Depository. Storing with us makes it quicker to move back into cryptocurrency when the time comes and avoid the costs and hassle associated with shipping metals."
He closes by suggesting listeners call Money Metals at 800-800-1865 for more information.
About the Author
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
