Are Cryptocurrencies the new Gold Rush?

Are Cryptocurrencies the new Gold Rush?

Crypto series article 3

By Dave Bellamy 18 Dec 2017

When I started this third article in my cryptocurrency series, Bitcoin had a historic week and hit over $19,000 at one point, about 15 times the value of an ounce of gold.

Bitcoin is has gone from near zero value at launch to around $19,000. The total market capitalization of the cryptocurrency market is now around $427 billion, about the same as that of the individual stock market values of some of the largest corporations in the world.

Bitcoin as the new hedge asset?

In the previous articles, I discussed the potential impact of cryptocurrencies on the financial system and also the gold market, considering that if cryptos were to increase in total value they would divert capital away from other markets. I considered that if Bitcoin were to increase to a $1 trillion market capitalization (the Bitcoin price multiplied by the total Bitcoins in circulation) and the total crypto market would probably be around 2 trillion at that time, serious effects might occur in other markets, especially those with which Bitcoin competes.

In particular I considered the potential impact on other alternative investment markets such as gold and silver and in my view these negative effects are already occurring. Bitcoin had a wild up week and gold and silver both slumped, with no obvious cause.

I think this is because the crypto market is already stealing away the appeal that normally went to gold and silver. Not only have cryptos way outperformed the precious metals but Bitcoin is being seen as a true alternative investment for the kind of people who want a hedge against possible currency failures and stock market crashes.

Hyperinflations coming?

At the same time, we are seeing a hyperinflation occur in Venezuela. Research needs to be done in academia or the financial companies to determine whether the attraction of cryptocurrencies is accelerating the flight out of the Venezuela currency, the bolivar and also whether Bitcoin is acting as a replacement for the precious metals. I suspect that the precious metals are vulnerable to a very serious hit, even an exodus if Bitcoin continues to soar and I also suspect that countries that have weak, badly managed currencies are going to experience a huge flight of money into cryptocurrencies and this could possibly trigger a number of hyperinflations that might not otherwise occur.

Gold Rushes

Bob Hoye, a veteran Canadian financial analyst and student of monetary history, who has been in the markets for around 50 years, has mentioned in various podcasts that gold rushes often take places during economic depressions. This of course makes perfect sense. There is high unemployment or underemployment and not much money to be found. There is often an increase in poverty. Enterprising people would then go out and look for money wherever it could be found, including in the ground itself. That money was gold or silver. It could be argued that the 1849 California Gold Rush occurred partly due to the depression after the market crash of 1837 and the Klondike Gold Rush of the 1890s happened in the late stages of the depression following the great market Panic of 1873. Indeed, after the recession of 2001-2002 and then the Great Recession of 2008-209, the price of gold soared and there was something of a minor rush into gold investment and gold exploration for mining. Typically in a deflationary economic depression, prices of many items either fall in nominal terms or they fall against gold and gold mining has great profit potential. The gold bull market of 2001-2011 had a downturn in the following years but showed a little life returning to it in 2016-2017.

Spanner in the works

However, a huge spanner has come into the works. That spanner was Bitcoin. It appears that Bitcoin is displacing gold as the “Go To” alternative asset. I am going to explore why I think that cryptocurrencies are already the new Gold Rush.

Sorting the brave from the not so brave

I, like many took a bit of interest in the concept of Bitcoin as it was promoted by the first adopters back around 2012-2013. However, also like many, I saw it is somewhat opaque and therefore difficult to enter as a market. That was a barrier to entry for the less enterprising. Of course, I am kicking myself now, big time. I have now realized that those barriers sorted out the men from the boys. Those men are now likely to be millionaires.

They were the first people to put a spade in the ground in this new gold rush. Of course, there are two kinds of ways to make money in cryptocurrencies. Firstly by potential capital gains, which for Bitcoin have already been enormous to the point of its looking like a bubble or mania. Secondly, by keeping the ledger of transactions in this peer to peer decentralized currency system, people (or computers) rewarded by the release to them of a portion of the remaining Bitcoins not yet in circulation. This is Bitcoin mining.

Bitcoin mining take s a lot of computer power but is being done by individuals and companies all over the world. In Russia for instance, there was a shortage of powerful computer video cards that might have had potential to be used to process the data for Bitcoin mining. Out of the 21 million Bitcoins that can be made available, 16.8 million are already in circulation, leaving around 4.3 million still un-mined. At last week’s typical price of $15,000 per Bitcoin, that is a potential monetary reward of $60 billion to Bitcoin miners. And that is just one cryptocurrency, albeit by far the largest right now. There are many competitors that will also be mined in a similar way. To put this in perspective, that is the same value as 48 million ounces of gold at the current gold price around $1250 per ounce!

These days, a 10 million ounce deposit of gold is a rare find – and one that is economically, politically and environmentally feasible to mine is an even rarer find!

Which to mine - Mine Bitcoins or Gold?

Even though Bitcoins are being mined every day, the explosive increase in the unit price has meant that the value of the un-mined Bitcoins has also been skyrocketing. This is surely going to divert speculative money away from gold and silver exploration and into cryptocurrency mining, perhaps in a really major way. I see this as having a potentially devastating impact on the gold and silver mining industries, which have only just begun to get their house in order following the excesses of the previous bull market and the sharp downturn that followed.

Mt instinct as a goldbug tells me that it is a slam dunk and a no-brainer that cryptocurrency mining is potentially superior to gold mining in every way I can think of - and I don’t care if that sentence ends in a preposition.

Lower Barriers to Entry?

The barriers to entry to mining cryptos appear to be much less onerous than to mine gold. Gold exploration is done outdoors by geologists, in remote, often cold weather areas, in places that can be politically hostile or even downright dangerous. There is an enormous time and cost involved in fulfilling all the environmental and other regulations to delineate a metal deposit and bring it to the surface: initial drilling, preliminary economic studies, infill drilling, feasibility studies, bulk sample analysis, getting a mining permit and finally building the mine. That isn’t the final obstacle because there can be regulatory changes or punitive taxation by political regimes eager to milk a mine’s profitability away once it is in operation. A large mine is likely to be a billion dollar investment and it can have many uncertainties plaguing it that are outside of the miner’s control.

More or less none of these apply to Bitcoin. To mine Bitcoins, you need to be a good computer hack and have a powerful computer system attached to the internet. Period. The barriers to entry compared to physical mining appear to be negligible. The main barrier is knowledge and that can be learnt. The size of the investment required is modest and also scalable. The more money you have to invest in it, the more computer power you can have at your disposal. Some individuals are already doing this on a tiny scale. They are a bit like the artisanal miners that one might see on the Gold Rush programme on television - but they don’t need nearly as much equipment and they can do it almost anywhere, not just in the frozen wastes of Alaska or northern Canada. Unlike many gold miners, Bitcoin miners can keep their operations running at night and through all the seasons.

It seems to me right now that the risks of crypto mining are fewer:

  1. Firstly, that the price of cryptocurrencies might crash before you regain your initial investment
  2. Too many people might think of doing the same thing at once
  3. Mining cryptos might cease to be economical for the above reasons
  4. Political restrictions (bans or capital controls) could restrict crypto mining and trading

Performance of the mined assets

Bitcoin was zooming in late 2017, while gold and silver were starting to slump. Gold hit under $1250 and silver went $16 (yet again). In early 2018, there has been a bit of a rally in the metals and quite a severe correction in Bitcoin - but 1 Bitcoin is still worth 10 oz of gold and 770 oz of silver!

The libertarian political mindset is common both to precious metals freaks and cryptocurrency freaks, so these markets are competing for that money. Cryptos are winning, hands down. How far will it go? What will happen when Bitcoin futures open on the same platforms as gold and silver futures in December 2017? Nobody knows but it will be interesting, that’s for sure when speculators can try to short Bitcoin on the futures market, if they dare.

World Gold Council Gold Demand Trends figures from 9 November 2017 already showed that overall gold demand in the 3rd quarter of 2017 had fallen 9% year on year, mostly due to less money flowing into the gold Exchange Traded Funds (ETFs). However, bar and coin demand was up a little and central bank buying was also up. Without the central bank buying, the demand figures would have been worse.

The hitherto unthinkable possibility is that cryptos could replace gold and precious metal investments as the “Go-To” alternative investment to hedge against the conventional markets and currencies. It’s not impossible that a bubble in cryptocurrencies could cause a crash in precious metals if it continues to progress rapidly.

The huge precious metals site now has Bitcoin and crypto quotes on its front page. This shows a shift of interest even among gold investors, miners and traders. This could go a long way, in my view. If gold and silver miners switch their investments to crypto mining, the current state of the whole industry could change. It will be fascinating to see if a major mining company moves into the crypto mining space in the near future.

One caveat could be that political and financial flow restrictions such as prohibition or capital controls could bring the crypto bubble to its knees but it is hard to see how that can completely burst the crypto bubble unless it is done on a worldwide scale. Until then, precious metals seem t be to be under threat.

The debate is on! I hope that you enjoyed the article and find it a useful pointer to further information and ideas. Please also see my sister articles on the potential effects of the crypto revolution.

References:  Cryptos Are Taking Over Markets But Not Gold - Frank Holmes WGC data. Cramer on Gold

This article © Dave Bellamy 2017.

Dave Bellamy is a Materials Engineer with a long time interest in numismatics and monetary history 

Disclaimer:  This material is research and is presented for educational and entertainment purposes only. It does not constitute financial advice and are not a solicitation to buy or sell any financial instrument or commodity at any time. Investment decisions are solely the responsibility of the investor. Investors have the opportunity to do their own due diligence and also to consult a qualified financial adviser before making investment decisions. The author has made every effort to ensure accuracy of information contained herein; however the author cannot guarantee such accuracy.


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