By JONATHAN HOLLOW
Fidelity, the US investment powerhouse, has announced that people saving for their retirement in 401(k) accounts will be able to buy and save in Bitcoin. The custody fee will be high: at least 75 basis points, or 0.75%.
Part of me thinks that if people are going to put money into Bitcoin anyway, Fidelity may provide them with a more secure, scam-proof route to doing so. Perhaps this is better than letting individuals hack their own path through the jungle. Yes, Bitcoin has created its own technological jungle: of coin wallets, password seed phrases, or hiring your own digger and lobbying the local authority to get your Bitcoin back, in the most extreme cases.
But for the most part, I think Fidelity’s move is one of the worst signs yet, out of an even more worrying big picture.
Is Bitcoin really an investment?
“Investing” is a loose word. It actually covers two very different types of expectation. You can either put money into productive human activities, such as companies, to see whether you can share in their future profits. Or you can put money into useful assets, such as steel or wheat, to see if you can benefit from rising prices.
It’s quite clear that Bitcoin is not in the first category. But is it even in the second, as an asset?
The Oxford English Dictionary says an asset is property that is “regarded as having value and available to meet debts, commitments, or legacies.”
Does Bitcoin meet that definition? Here, a ferocious debate begins. Is Bitcoin a good investment?
The naysayers have a simple argument. They say that Bitcoin has no intrinsic value. It doesn’t even exist physically! They say that the only reason why people buy it is they think somebody else will buy it for more money later. This puts it in the classic “bubble” and “greater fool” territory. (Perhaps a “greater fool” will buy Bitcoin later on, leaving the earlier buyer looking like the smart one.)
The Bitcoiners attack this with a variety of lines:
- It’s been around for more than ten years, so it has proven its intrinsic value.
- The technology that underlies it will liberate us from currencies governed by central banks.
- The mathematical algorithms limit Bitcoin to a maximum of 21 million coins, so each coin can only become more valuable in the future.
- Some invoke a variety of cultural arguments that are more about giving insiders a fuzzy warm feeling, and shaming outsiders, than making rational decisions about investing.
- Some point to other cryptocurrencies that are like Bitcoin but fix some of its intrinsic problems.
One of the most interesting lines of argument, however, is that gold has no intrinsic value, but it’s earned its place in the pantheon of asset classes. If gold can, why not Bitcoin?
What is gold good for?
Gold is shrouded in mythology. When this is stripped away, we see that it has relatively few practical uses:
- It has been used for thousands of years in dentistry.
- Its conductive qualities mean that tiny amounts of it are in every computer and mobile phone.
- Its reflective qualities have been much exploited in the very small amount of industry focused on space – in space suits, and reflective surfaces to cool and protect space vehicles.
- But, relatively speaking, these uses don’t create a vast industrial appetite for gold, compared to other metals such as platinum or silver.
Of course, gold is very popular in jewellery. But this reflects (almost literally) its cultural status, and probably depends on the view that it is a store of long-term value. This is not an industrial use, it’s a cultural cachet.
By and large, I think the evidence supports the view that gold keeps pace with inflation over very long periods of time. And when I say very long periods, I mean — since Roman times. This puts it in a class of its own in the history of investment evidence!
My view comes with two caveats, however. Very long periods means: over centuries and centuries of fluctuation. Most people don’t live for a century, but they will experience big fluctuations in gold prices during their shorter lifespans.
The second point is that simply keeping pace with inflation means that gold isn’t an investment, it’s really a store of value.
If you are happy to take heart from a 50-year history, gold has returned a 3.7% real return above inflation since 1970. So its recent history is more encouraging for “gold bugs”. Perhaps they actually stand to gain from gold.
Which has been the greater mistake?
When I looked into the evidence about gold, I was happy with the theory that investing up a few per cent of your portfolio in it was a sensible way to diversify. I currently hold 1% of my portfolio in gold, and it’s made a 16% return over the five years that I’ve held it. I also bought some silver, which has more practical uses than gold. This has risen even more. So with a strictly short-term view, these look like good decisions on my part.
I then convinced myself, when Bitcoin passed its ten-year anniversary, that putting an even smaller fraction of my portfolio’s value into Bitcoin was also a good idea. My reasoning was that I could buy what I could afford to lose. And (so I thought) it was looking more like a reasonable bet that Bitcoin might become a long-term store of value, akin to gold. I bought £700 worth. My intention was to buy it and forget it for many, many years.
In fact, I kept it for about five months, then sold it for a tiny profit. There is so much noise about Bitcoin in the media, I couldn’t stop myself peeking at it to see what it was doing. And I realised that this was a terrible distraction and waste of my time, in relation to a small sum of money.
But I also read more about Bitcoin because of my vested interest in it. And I changed my mind against it for two key reasons:
- There was much more coverage of the environmental problems that are being caused by the energy required to mine Bitcoin, and to trade in it. This struck me as literally unsustainable, not only now, but even more so in the hypothetical future where Bitcoin is used not just for investment, but as everyday money. And this linked to my second issue.
- I saw more and more evidence that Bitcoin is not a currency. By this, I mean it is totally impractical for everyday purchases. This trend continues, despite the blaze of publicity when a business, such as Tesla, or a country, such as El Salvador, announces that it is adopting Bitcoin as a form of tender. If you can’t spend a digital currency without lots of friction, even its name is a misnomer.
Which will have proved my greater mistake: investing a reasonably substantial sum in gold, or selling my tiny stake in Bitcoin?
Focusing on the evidence
Well, as you can imagine, writing for The Evidence-Based Investor, on the great gold vs bitcoin debate, I’m going to argue from the evidence. And particularly from the view that the longer the evidence record, the more we can trust it.
The evidence for gold as a store of value is compelling. It goes back thousands of years in quite broad terms, and hundreds of years in quite detailed price history. Gold does have some practical uses, wide cultural acceptance across many countries, and it does physically exist!
The evidence for Bitcoin as a store of value only goes back ten years or so. It has no productive uses. It has no physical existence. Using it even for spending, for everyday transactions, is expensive and volatile. I can’t say for sure that it won’t have a good run for five, ten or 20 years. But my view is that it doesn’t meet the test of a sensible asset class.
I don’t regret flirting with Bitcoin. I learned something, and I didn’t lose any money. But I’m delighted not to have a financial interest in it any more. More and more I think that the only reason to buy Bitcoin is because you think somebody else will buy it for more money later. If so, this will literally end in tears.
So with the passion of a convert (or rather, the de-converted), I think it’s highly regrettable that Fidelity is putting bubble territory within the grasp of the tens of thousands of retail investors.
JONATHAN HOLLOW worked for the UK Government’s Money and Pensions Service and is a writer and commentator on consumer education and protection.
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© The Evidence-Based Investor MMXXII