For years, I have implored cryptocurrency advocates to take a step back and reflect on one key aspect of the market — namely, cryptocurrencies are quoted in dollars.
When you brag about mind-boggling gains you made speculating in Bitcoin, you talk about how you bought it at (I don’t know) $550, and sold it at $15,000. Note that the conversation only makes sense in the context of dollars. Also note that the dollar is so ubiquitous that one doesn’t even notice its presence in the discussion. It’s a given. You have to have it as a reference point. Otherwise, the conversation is gibberish.
Bitcoin rose near $11,000 recently alongside the surge in gold. That is not a coincidence. Although I would not personally equate the two, many observers are inclined to do just that on the excuse that, like gold, Bitcoin is a hedge against currency debasement and monetary/fiscal largesse.
I should emphasize (again), that while I’m no fan of holding outsized gold positions given the lack of an internal rate of return and the fact that its utility outside of serving as a portfolio hedge is, in my mind, quite limited, I would never malign gold in the terms I’ve often used to discuss Bitcoin.
According to JPMorgan, flows into Bitcoin over the last six months are elevated, a testament to investors’ fascination with “secular themes like… alternative reserve assets”.
Amid gold’s historic surge (which on Tuesday appeared to hit some turbulence at high altitude), I want to take the opportunity to point out that the yellow metal is vulnerable to the same criticism I’ve leveled against cryptocurrencies.
It’s true that you’ll find plenty of charts (often emanating from some of the seedier corners of the online marketplace for financial commentary) which price other assets in gold. But, at the end of the day, it too is priced in dollars.
On Tuesday, Rabobank’s Michael Every drove this point home quite effectively. “There is so much obsession with gold at the moment — there seems no stopping it”, he wrote, in his latest daily missive. (As an aside, Every’s notes have made their way to the very top of my morning reading list, no small feat — they pair well with espresso and a predawn cigar on the back deck.)
“Will we get to $3,000, as one major bank is claiming, or will we go to $5,000, as a razor-sharp friend suggested to me yesterday?”, Every went on to wonder. Then, he delivered a reality check, as follows:
Either is possible given the current trend. And, if you buy gold, technically that is going to make you money. And yet that money is still going to be priced in US DOLLARS — and that gives the whole game away. Gold fans can dream of the distant past when gold was the centre of the global monetary system; but they can keep dreaming if they think those days are ever going to return. Gold may be an appreciating asset, but all the evidence suggests that it won’t be one that is of any direct relevance to day-to-day life, finance, and business. Your currency won’t be tied to it. You won’t get paid in it. You won’t spend in it or save in it (other than to the switch back to US Dollars). You won’t be doing deals in it or importing in it.
And there it is. A wonderfully concise version of a snarky series of tweets I delivered last week.
There’s something self-evidently absurd about designating something as an alternative to the dollar, when that thing is by necessity priced in dollars. Gold and Bitcoin can be priced in other currencies, of course, but outside of that context, the whole “game” (as Every puts it) ceases to make much sense.
Obviously, it makes more sense with gold (compared to cryptocurrencies), given gold’s reputation as a store of value and a medium of exchange which has endured over the centuries. As one reader pointed out last week, countless people have fought and died for gold.
But even there, it’s difficult to discern what, exactly, it is that you’re saying when you assert that a given quantity of gold is, for example, worth two beaver pelts. Why? Note that referencing some previous exchange doesn’t really work. That is, you might say “Well because I exchanged a larger quantity of gold last week for a musket and a canoe, and clearly a musket and a canoe are together worth more than a pair of beaver pelts”. But that just begs the question. It’s an infinite regress.
With Bitcoin, such conversations make no sense whatsoever. It simply doesn’t work the other way around. You would never quote dollars in Bitcoin. That is a nonsense proposition.