The Truth About Gold & Crypto
March 15, 2024
9
min. read
We receive a lot of questions about gold and crypto and whether either has a place in your portfolio. Grab a beverage and let’s dive in, this is going to be a good one…
Gold and crypto have a lot in common.
They both fall squarely into the category of assets that never produce anything. Both are purchased with the hope someone else will come along and pay more for them in the future (aka the greater fool theory).
Owners of these are not inspired by what they can produce (gold and crypto will remain utterly lifeless forever), but rather the belief others will want it more when they are ready to sell.
Their owners tend to fear almost all other assets, especially paper money. They also fear our government, and in most cases, are rooted in a form of financial nihilism and fears of the world at large.
When it comes to both gold and crypto, we say Caveat Emptor.
But to better understand why, let’s take a deeper look at each asset.
Gold has been around for thousands of years. It provides no profit, cash flow or dividends on it's own. If you own an ounce of gold for eternity, you will still only own an ounce at its end. It does have some intrinsic value due to it's industrial and decorative utility. The demand for these purposes is both relatively limited.
Gold has been making a bit of a comeback lately and its price has risen accordingly reaching an all-time high of $2,170+ an ounce in 2024. According to the most recent Gallop Survey, nearly 30% of U.S. households reported gold as the best long-term investment. Right behind real estate, but ahead of stocks, bonds or cash. One of our favorite financial bloggers Ben Carlson recently wrote about the investment case for gold (spoiler: there really isn't one).
It’s on nearly every financial infomercial and you can now literally buy gold bars at Costco. People are flocking to buy these gold bars hand over fist. It’s so popular right now, Costco sold $100 million worth of gold bars in the first quarter they offered it (through October 2023).
As Warren Buffet said:
Investors who require a supportive crowd pay dearly for their comfort.
The truth is, over the last 200+ years, after inflation, gold has returned virtually zero.
Compare that to owning stocks and it's just not even close.
The math and history are very clear.
Like Warren Buffet, we believe gold is a terrible investment.
Crypto, on the other hand, has been around for a little more than a decade.
Like gold, cryptocurrency has exploded in popularity since the first of its kind (Bitcoin) was created in 2009 by “Satoshi Nakamoto” (an unidentified “person” of unknown origin). There are currently 23,000+ different cryptocurrencies in existence (according to CoinMarketCap), the largest being Bitcoin. People (and companies) are literally falling all over themselves to get in on this in one way or another.
FOMO (the fear of missing out) is alive and well, especially when it comes to cryptocurrency.
The price of Bitcoin has appreciated immensely since it was first invented in 2009 briefly touching a new all-time high just above $73,000. Priced in dollars... how ironic.
Like gold, it pays no dividend and produces no cash flow or profits on its own. If you own a token of bitcoin or any other crypto for an eternity, you will still only own one coin at its end, assuming it is still in existence.
Unlike gold, however, crypto has absolutely no intrinsic value and offers no economic or ancillary benefit. And, in the case of Bitcoin, it's terrible for the environment.
The story to own or buy crypto changes to fit the desired narrative of the day. In the beginning, it was supposed to be a currency, then it was a store value. Now it's just a trading vehicle for rampant speculation and a haven for scams and criminal activity.
Behind each sexy new use case lurks a scary story rooted in an anti-US rhetoric steeped in financial nihilism and advocating for the demise of the dollar using cool phrases like "defi", "decentralization", "blockchain", "ledgers" and "fiat currency" with talks of "green candles", "metadata", "diamond hands", and "digital gold."
Ultimately the case for owning any of these coins plays on fear around rising US debt levels and the end of days as we know it.
Like that of gold, the key to investment success in owning crypto is the belief that the number and ranks of fearful people will continue to grow and someone will pay more for it than the last person.
Recently this has proven to be correct and profitable for those speculating on it. But what the wise man does in the beginning, a fool does in the end.
The rising prices of both gold and crypto have not only increased their popularity, but have created their own additional buying enthusiasm, attracting buyers who see the rise as validating their investment thesis, whatever that may be.
And as Buffet famously said:
As bandwagon investors join any party, they create their own truth… for a while.
While crypto came roaring out of the gate, but like Buffet and Munger, we believe it’s demonstrably worse than gold.
Buffet said “If you told me you own all of the Bitcoin in the world and you offered it to me for $25 I wouldn't take it because what would I do with it? I'd have to sell it back to you one way or another. It isn't going to do anything.”
At best, we believe crypto is momentum chasing speculation (i.e. gambling), not investing, and it's certainly not changing the world or an arbiter of anything as it relates to the health of US or global financial system.
It will keep going up as more people keep buying... until it doesn't.
There are a litany of reasons we would never recommend Bitcoin or any other cryptocurrency, but our reasons essentially boil down to three:
Today, about 212,500 metric tons of the world's gold has been mined. If melded together, it would form a cube that would not be much bigger than a baseball infield. It’s static. Unchanging and will not produce anything ever.
As of this writing, gold is $2,162 an ounce, its total value would be just over $16.2 trillion while the current value of all cryptocurrencies, including that of Bitcoin, is currently around $2.8 trillion.
Let’s call the combined $19 trillion in these two Bucket A.
Now let’s compare to Bucket B, valued at an equal amount.
For $19 trillion, we could buy 45% ownership of the entire S&P 500.
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Let's call this Bucket B which represents real tangible ownership in a diversified group of the world’s leading and most innovative businesses managed by the most experienced, intelligent and resourceful people on the planet.
And a 45% equity ownership therefore represents real ownership interest in the combined profits and dividends produced by these great businesses each year.
For some perspective, this combined group of the world's greatest companies produced $1.6 trillion in profits and paid out $588.2 billion in dividends in 2023.
Let that sink in for a minute.
That was just the profits and dividends of these companies in a single year.
History clearly shows that reinvesting the rising profits and dividends historically increases the overall value of the investments in Bucket B at a rate of nearly 10% per year over the last 100+ years.
Essentially doubling the value of this productive asset every 7 years.
Even better, the bad companies are automatically replaced with better companies over time as the world changes and businesses innovate.
All you have to do to benefit is simply own it.
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Now let's look at what happens to Bucket A and B over time.
Beyond the high valuation given to gold currently, mining gold increases the supply by about 3,000 metric tons per year ($229 billion at current prices). Buyers, whether jewelers, industrial users, panicked individuals or even speculators, must continually absorb this additional supply to remain even at present values.
As for Bitcoin, there are over 19,652,000 in existence and math nerds will continue to "mine" an additional 1,350,000+ coins until the magical year 2140. So, the holders and buyers of additional Bitcoins will have to absorb this supply as well as compete with countless other crypto coins that may be created over the next hundred+ years.
Conversely the portfolio of diversified companies in Bucket B will have produced billions of profits and useful goods and services for consumers. In addition, these companies will have provided billions of dollars in dividends and its owners will hold assets worth many more trillions than today.
Decades from now the 212,500 metric tons of gold will be unchanged in size and still incapable of producing anything as will the 20 million+ in Bitcoin and other cryptocurrencies.
A century from now, when people are fearful many will rush to gold, crypto, or the latest and greatest thing promising quick, overnight riches. We're confident that the $19 trillion of assets in Bucket A will compound over the next century at a rate far inferior to that achieved in Bucket B.
The Bucket A enjoys maximum popularity at peaks of fear, yet its underlying investment thesis is rooted in the pending destruction of our country and our currency.
The second bucket is real, tangible ownership in America’s best and most innovative people and companies.
It is the pride and joy, and profits and dividends, of American entrepreneurship.
After reading this and thinking logically, can you imagine any rational investor choosing Bucket A over Bucket B?
Or put another way, whether you have $19 trillion or $1,000:
Would you rather own a diversified basket of the most profitable, productive and innovative businesses on the planet OR a static block of gold or imaginary "digital gold" with the hope someone comes along and pays more for it later?
To us, the choice is an easy one.
Have a great weekend,
