Opinion

Bitcoin and the golden opportunity

photo_camera Atalayar_Bitcoin

The rise of the Bitcoin price is certainly exceptional. From the beginning of 2020 to April 2021 alone, it gained 687 per cent. Had you invested, say, 1.000 USD in Bitcoin, you would own an equivalent of 7.870 USD. Whether the extraordinary ascent of Bitcoin and other crypto units is justified, will prove sustainable or will be reversed at some point is hotly debated. I can assure you, dear readers, that this article will not provide you with a final answer. I would, however, like to make three points in this context.

Point number one: If and when an asset gains in market price very strongly and in a relatively short period, it often encourages additional buyers – well known as speculators and “dumb money” – to jump on the bandwagon. This, in turn, adds to the upwards pressure on the market price of an asset and carries the risk of driving said asset’s market price into bubble territory.

Point number two: Monetary policy is outlandishly expansionary. Interest rates are very low (in real terms), credit flows easily, and the money supply is growing rapidly. This is a monetary environment that encourages investors to act carelessly. Not only do they tend to take on more and more risk, but they also get carried away by the impression of unlimited and endless market liquidity

Point number three: The Bitcoin space is no longer populated by “die-hard Bitcoin hodlers’”, who hold their “private keeps” close to their chests. Wall Street and Main Street have recently also flooded into cryptos – most of them seeking to participate from the price gains of the Bitcoin rather than intending to pay their bills with Bitcoins or betting that Bitcoin will become the money of the future of this world.

In other words: Monetary conditions are excessively easy; a growing number of speculators and ignorant people appear on the buy side; and crypto markets are probably red hot. Against this backdrop, one is well advised to remain cautious when it comes to expanding one’s Bitcoin exposure.

It is worth keeping an eye out for opportunities, especially for those assets that have not been on the wish list of the herd of investors lately. Clearly, gold and silver come to mind. The rise of Bitcoin has outrun gold and silver big time: Since January 2020, the gold price gained a mere 16 per cent, the silver price 45 per cent.  

In view of the risks building up in the global financial and economic system, and taking into account the latest lack of interest in “the ultimate means of payment” due to the “crypto hype”, it might not be disproportionate to expect that gold and silver, at current prices, offer a substantial upward potential as well as a rather attractive risk-return profile for the long-term oriented investor – in other words: a golden opportunity.

Thorsten Polleit. Chief Economist at Degussa.