Can Cryptocurrencies Replace Gold as a Hedge Against Government Inefficiency? by Van K. Tharp, Ph.D.

We now have several dozen major crypto-currencies. These include the familiar ones like Bitcoin and Ethereum which together make up about 75% of the market. There are now, however, a number of other important cryptos which include Monero (XMR), Steem Power (STEEM), Lykke (LKK), Antshares (ANS), Peerplays (PPY), Factom (FCT), Ethereum Classic (ETC). Beyond those, more than 20 other “major” cryptocurrencies have emerged very recently.

Cryptocurrencies are still very early in their life cycle. In January 2017, the market cap of the entire cryptocurrencies market was about $21 billion (US). Not long after that, it dropped down to about $14 billion but by late May, the market had recovered and gone up to $88 billion. It dropped shortly afterwards to around $60 billion and then it went to about $120 billion. Right now it’s around $81 billion. Those are huge fluctuations – and all of them happened in the first six months of this year. From its low to its high in 2017, the cryptocurrency market cap increased about 857%. That kind of range never happens with stocks. Cryptocurrencies have also had three separate market cap decreases of about 30% — just this year. That never happens with stocks either.

Cryptocurrencies have also been gaining the attention of big money in the last year. One firm applied to offer an ETF based on Bitcoin. That wasn’t approved – but a Bitcoin ETF is probably inevitable. And now, we have the possibility of buying/selling options soon on Bitcoin and Ethereum so that investors can hedge their bets to minimize their risk. Making options available on cryptocurrencies could easily send the market cap up another 850% within the next six months to a year. In a few years, cryptocurrencies could have a trillion dollar market cap . . . and at that point, things are going to get really interesting.

What Is This All About?

Cryptography is a way to communicate privately. Cryptocurrencies are basically a way to store money in a computer and send it securely from one location to another. A cryptocurrency is a decentralized peer-to-peer system — an open system – and very different than the current banking system. Each cryptocurrency runs on a public ledger that’s called a blockchain.

Currently, when you go to a bank and withdraw money, the bank looks at the ledger in its systems to determine if you have enough in your account. If you do, then you can withdraw the money. Then instantly, your new balance is “known” at every ATM and at every other bank. That ledger system is “closed” – only banks know the available balance for an account.

The blockchain is also a ledger system but it is public. All transaction details can be seen by everyone though the identities of the transacting parties are anonymous. But thousands of independent computers all over the world know what’s going on because they are constantly talking to each other.

Besides the public ledger, blockchain technology is revolutionary for several additional reasons –

  • It is impossible to shut down.
  • It prevents double spending.
  • It cannot be hacked.
  • It does all of this without needing a central authority.

Systems thinking would refer to blockchain technology and cryptocurrencies as a self-organizing, emergent phenomenon.  If economists still hope one day to predict economic activity with any accuracy, cryptocurrencies will add an entirely new dimension to the process. Cryptocurrencies could one day eliminate central banks and government control of money which will probably destroy whatever validity their models currently have. In fact, cryptocurrencies have the potential to become a form of international money.

Bitcoin, the first cryptocurrency, used to be considered somewhat shady – an underground way to handle certain online purchases and sales. But today, companies such as Cisco, WalMart, Starbucks, and Microsoft all accept payment by Bitcoin. In fact, more than 100,000 merchants today accept Bitcoin – that’s more than 20 times the number of merchants just four years ago. (I am open to having the Van Tharp Institute accept it as well in the future.) And today, you can actually hold Bitcoin in your IRA.

Regardless of your home country, Bitcoin has suddenly become a hedge against imprudent government monetary policies – be those of the US, Europe, or Asia. Here we’re talking about things like negative interest rates, an unofficial debt of over $100 trillion, etc.

Given the troubles with existing currencies, I would have expected Gold to have been doing very well in its traditional role as the primary hedge against such troubles. Gold, however, has been in a flat range for years and significantly below its 2011 high. See the chart below of the London PM fix of Gold over the last 10 years. There’s certainly little to get excited about here. In addition, I recently bought some U.S. Liberty $20 gold coins at only a few dollars above the spot price of gold. To me, that says something could be wrong with the gold market.
857 chart1
Bitcoin emerged in 2009 but it began to get serious about the time Gold started to fall off its highs. Do you think there is a coincidence there?

Change Is Inevitable.

Right now, Forex is a huge market with daily volume of about $5.3 trillion in trading. Contrast that to the market cap of all cryptocurrencies at about $81 billion where Bitcoin has about 50% of that total and Ethereum has another 25%. Even with those humble figures today, however, it wouldn’t surprise me if cryptocurrencies one day replaced government-backed money.

Forbes recently published an article listing about fifteen hedge funds that are investing in cryptocurrencies. When options allow hedging for Bitcoin and Ethereum, expect the number of hedge funds trading cryptocurrencies to go up dramatically. If the SEC approves a Bitcoin ETF in the next few years, then everyone will be able to easily invest in cryptocurrencies – and the floodgates will open.

In the meantime, I’m exploring investing some of my own money (a very small amount) in cryptocurrencies. I regret that I didn’t get in when I first thought about it a few years ago when Bitcoin was at about $500. Contrast that price with Bitcoin’s fluctuations today at around $2,300.

We will probably present a lot more about cryptocurrencies in the future. In the meantime, you can get some idea what is going on from this website – They currently list 810 different cryptocurrencies and the list continues to grow.

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