Thoughts on Alternative Investments: Gold and Bitcoin

In today’s post I am going to talk to you a bit regarding my thoughts on investing in alternative investments. What are alternative investments you ask? Well typically these are alternates to stocks, bonds, real estate, and cash. In this particular case though I will focus on investments like Gold, Bitcoin, and potentially other categories of items where the investment has no underlying intrinsic value.

Alternative Investments with No Intrinsic Value

Now before the Bitcoin fans get after me, yes you can use your Bitcoins to make some purchases. You can also use gold to make some purchases. But, neither gold nor Bitcoins on their own have intrinsic value. You’re not going to make a car or a hammer out of gold. Nor will you use Bitcoins to power your car. The value of these and other alternative investments are purely related to the worth society places on them as they have no industrial value.

Speculative Alternative Investments

Which brings me to my first thought on this class of investments. Because they have no intrinsic value any investment in them is utterly speculative. If people decided tomorrow that the new hotness was Full Time Finance coin, thus abandoning Bitcoin, then Bitcoin would be worthless. If everyone decided gold was also useless and started valuing say Tulips, then Gold would then be worthless. They have no underlying value behind them.

Tulip Mania’s

Now before we continue I would like to point out I chose Tulips for a reason. A famous event in history, and one of the oft cited first financial bubbles, was the Tulip Mania of 1620s and 30s. The cost of a single tulip ballooned quickly to 10 times the annual income of a skilled worker. Then just as quickly as it rose the value of those Tulips collapsed, leaving many with nothing but a bit of tulip. A tulip may be nice to look at, but the actual utility of the Tulip was not tied to it’s price. The same can be said for gold or Bitcoin.

Currency Investing is also Speculative

Now, one could also say that the value of the dollar has the same issue as Gold and Bitcoin. Technically it’s value is based solely on the perception of the people and the world of what the backing of the US governments full faith and credit means. You can’t eat a dollar, and it’s illegal to write on it, so in fact, investing in currency swings of the US dollar is also a type of speculation.

What is not Speculative?

So I’ve spent about half a page describing that investing in Gold, Bitcoin, and even US currency is speculation. Before we step into whether that means you should invest in it or not, lets look at what is not speculation. These are things with intrinsic value: so stocks which are priced based on their earnings, bonds based on their returns, real estate based on their return and utility, commodities based on their utility, etc. These things all have some level of intrinsic value.

Non-Speculative Investments are Not Necessarily Free from Speculation

It’s important to note though, while these investments are not speculative by nature, they can be priced speculatively. I.e. the value can move beyond their intrinsic value. Take Tesla stock for example. It’s value has no basis in its underlying intrinsic value, i.e. its lack of profits do not portend it’s price. People investing in Tesla are speculating that they will bring along the wave of the future and the value will rise. It is beyond the scope of this post to judge speculating on Tesla stock, it’s just something to realize. The point however still stands, stock still has some underlying value. That intrinsic value could even be as small as the book value, or the value of liquidating the entire company and giving investors the proceeds.

So Is It A Bad Idea To Invest In A Speculative Investment?

But does that make a fully speculative investment a bad idea? Well as a large portion of your portfolio most definitely, as you should not be taking moon shots but hitting doubles with your nest egg . But on a smaller scale, perhaps in a play portfolio, there is nothing intrinsically wrong with a speculative investment. But what about Gold and Bitcoin specifically?

Gold’s (Poor) Performance as an Investment

Well first Gold. The statement you always here is Gold is a good hedge for inflation. The thing is, I’m here to tell you it is not. If you look at the history of the price of gold over the last 30 years you’ll quickly see that there was a whole period from 1980 to 2000 where the price declined. The thing is, inflation did not stop during this period. In fact inflation from 1980 to 2000 was on average 3.73%.  Using the rule of 72 , inflation halved the value of the dollar over this period. So with a decline gold would have lost you over 50% over this period. Not exactly a good store of value or inflation hedge.  When considering the 7 percent average return of the stock market during this period it was a dreadful investment.

Gold and The End of The World

Still the gold bugs would point out if the S#$% hits the fan gold will save you. Then they’d point to golds meteoric rise after the 2008 crash. For a bit of time they had a point. Sure after the crisis was averted the value reverted to a decline again, but for a brief moment it showed it’s potential in a black swan environment, right?

Well here is the thing… Define black swan. If the event is truly a collapse of the financial system or other major issue then will gold really help you? If you do not have it physically at your house how will you get it in such a scenario? Even if you can get it, how will you break it down into manageable units? If it’s truly the apocalypse what idiots going to trade their last loaf of break for a hunk of rock? It’s all a little unreasonable when you truly think about it.

Gold is A Good Investment Only When Things Go Sort Of Really Bad

So we’re left really with gold only being a good investment with black swans that do not truly result in a collapse. That is what you are speculating on with gold, good or bad.. So I leave it to you the reader if that is a bet you want to take.

Bitcoin and a Bet On The Future

So what about Bitcoin? Bitcoins underlying technology, distributed low cost communication of funds where both parties do not need to have a central arbitrator is revolutionary. The technology itself will definitely change the world as we know it, some day… But a bet on Bitcoin is a bet that the someday will come soon. It’s also a bet that Bitcoin is the implementation of that technology that will succeed.

Bitcoin is Just One Possible Variation Of The Future

You see there are a million different forms of cyber currency now that Bitcoin introduced this technology. I’ve read that in some ways Etherium, a competitor, is even a better option then Bitcoin these days. So the real question you need to ask yourself when investing in Bitcoin is not will this technology change the world. It’s will the Bitcoin variation end up being the winner and will it happen in my investment horizon. If thats not the case then you will lose over a reasonable timeframe.

Other Historical Examples of Betting On The Future

Now to highlight the risk your taking I will give you one more analogy. In the 80s we were introduced to two video technologies, Betamax and VHS. Barely anyone remembers Betamax as VHS beat them so bad they are largely forgotten. But what else is forgotten is Betamax was the superior format. It just didn’t take off. So even if you believe Bitcoin is the best form of cryptocurrency possible, there is no guarantee it will be the one that comes out on top.

So Where Does This Leave Alternative Investments

Some will read all this and say I’ve been overly harsh on these alternative investments. But you’ll notice in neither case have I told you not to invest in them. This is for two very good reason. For one, if you truly believe in them there is nothing I can say to dissuade you from investing. For two, if it’s a small enough portion of your portfolio you may find value in the investment anyway.

Perhaps the thrill of the possibility of hitting it large or participating in a major societal change will give you some underlying value from the investment. Or maybe you’ll get lucky and cash out on one of the short term bubbles. Or maybe, and this is a real long shot, one of the bets I have described above will pay out. In any case I wish those who invest in these alternative investments well, and hope they do so with their eyes wide open.

Do you invest in bitcoin or gold?  If so, why?