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I use Bitcoin to satisfy my inflation-hedging appetite. I wonder to what extent cryptocurrency enthusiasm is suppressing gold prices, as increasing number of p

by cwkoss 5y ago

I use Bitcoin to satisfy my inflation-hedging appetite. I wonder to what extent cryptocurrency enthusiasm is suppressing gold prices, as increasing number of people view Bitcoin as a viable inflation hedging alternative to gold. If Bitcoin didn't exist, I would probably own more gold.

asdff 5y ago
Something that might move hundreds of percentage points in either direction in a given year seems like a poor hedge against inflation to me.
- orthros 5y ago
  I'll be the pedant to point out it can't move more than 100% on the downside. Which since it has risen more than 100% in less than a year seems like a decent deal although fraught with risk to be sure.
- yaa_minu 5y ago
  Yes, in the short term, neither gold nor even gold is a good hedge. Cash will always be superior in the short term unless we're in a hyperinflationary situation. However, on a long enough time scale, gold and bitcoin can function as great inflation hedges. I say this with a little bit of caution especially for bitcoin because it's only a few years old but we know for this short 12 year period that no one has lost money by holding bitcoin for more than 4 years.
  - candiodari 5y ago
    I think I'm against this argument, and instead present of Warren Buffet's. If you think gold is a good hedge against inflation, a consumer staple with a safe position (ie. Coca-Cola) is a better inflation hedge. The same argument would apply to a whole lot of companies in the "necessities" department. They provide every bit of inflation hedge value Gold provides, but also provide dividend and stock appreciation.
- cwkoss 5y ago
  I would be very surprised if Bitcoin moved more than 100 percentage points downwards :-P But on a more serious note, this bet is based on the idea that if/as USD hegemony collapses (in ~decade time scale), inflation will accelerate and there is an increased chance that Bitcoin becomes world reserve currency. I believe Bitcoin volatility will decrease as price grows (it already has to an extent), and once it has about one more ~10x increase (reaching roughly market cap of total earth gold supply) the bubble/bust pattern will break and it'll become more stable. But who knows. I recommend keeping 1-5% of net asset value in cryptocurrency (BTC, ETH, maybe ADA if you like risk, roughly weighted by market cap and ignoring long tail of unproven coins), but it is certainly a very risky investment and securing them has unique technical challenges that make them less suitable for non-technicals.
- Geee 5y ago
  There are just two years in Bitcoin's history when it had a negative return: https://stats.buybitcoinworldwide.com/yearly-candles/ https://stats.buybitcoinworldwide.com/yearly-candles/
  - pxue 5y ago
    That's what Ponzi scheme sales person would proclaim, until not true.
    - cwkoss 5y ago
      Discussing historical performance is ubiquitous among all asset classes. If you're going to try to argue that Bitcoin is a Ponzi scheme, at least put some effort into the argument. This is just lazy and simplistic.
throw0101a 5y ago
> If Bitcoin didn't exist, I would probably own more gold. Do you have any evidence that gold is a hedge against inflation, or are you simply following financial folklore? > We find little evidence that gold has been an effective hedge against unexpected inflation whether measured in the short term or the long term. The gold as a currency hedge argument does not seem to be supported by the data. The fluctuations in the real price of gold are much greater than FX changes. We suggest that the argument that gold is attractive when real returns on other assets are low is problematic. Low real yields, say on TIPS, do not mechanically cause the real price of gold to be high. While there is possibly some rational or behavioral economic force, perhaps a fear of inflation, influencing variation in both TIPS yields and the real price of gold, the impact may be more statistically apparent than real. We also parse the safe haven argument and come up empty-handed. We examine data on hyperinflations in both major and minor countries and find it is certainly possible for the purchasing power of gold to decline substantially during a highly inflationary period. When the price of gold is high in one country it is probably high in other countries. Keynes pointed out “that the long run is a misleading guide to current affairs”. Even if gold is a “golden constant” in the long run, it does not have to be a “golden constant” in the short run. Conversely, current affairs are possibly a misleading guide to the long run. * http://www.nber.org/papers/w18706 http://www.nber.org/papers/w18706
- drcross 5y ago
  If gold is not the mainstay of inflation hedgers why would it not be; maybe because people don't know with certainty that they aren't buying gilded tungsten or that virtual gold purchases could disappear at any time? Maybe crypto is the gold that gold could never be?
- cwkoss 5y ago
  I don't find this persuasive at all. Seems like they looking at this from an institutional perspective of hedging a single currency, looking for tight correlations over a short time periods. I don't care if there is a year or 5 of lag in either direction, or if gold outperforms currencies in a period in a non-correlated way. Funny that they quote Keynes because it seems like a superlatively Keynesian perspective on gold. I'm concerned about the simultaneous inflation of all fiat currencies that arises from adversarial currency wars to game trade flows and reckless Fed policy devaluing what's in my bank account as a hidden tax on saving. I want an asset that is resistant to devaluation of money and the historical examples of governments leaving the common man as bag-holders when a currency fails. I want something I could bury in the ground and feel confident that it'll be worth more when my grandchildren dig it up. Maybe in a pedantic sense, "gold is a hedge against inflation" is "folklore" because the correlation is loose over short time periods, but over long time scales it works pretty well. Until asteroid mining is prevalent (and possibly beyond that) an ounce of gold will likely continue being enough to buy a good suit.

by cwkoss 5y ago

asdff 5y ago

Something that might move hundreds of percentage points in either direction in a given year seems like a poor hedge against inflation to me.

orthros 5y ago
I'll be the pedant to point out it can't move more than 100% on the downside. Which since it has risen more than 100% in less than a year seems like a decent deal although fraught with risk to be sure.
yaa_minu 5y ago
Yes, in the short term, neither gold nor even gold is a good hedge. Cash will always be superior in the short term unless we're in a hyperinflationary situation. However, on a long enough time scale, gold and bitcoin can function as great inflation hedges. I say this with a little bit of caution especially for bitcoin because it's only a few years old but we know for this short 12 year period that no one has lost money by holding bitcoin for more than 4 years.
- candiodari 5y ago
  I think I'm against this argument, and instead present of Warren Buffet's. If you think gold is a good hedge against inflation, a consumer staple with a safe position (ie. Coca-Cola) is a better inflation hedge. The same argument would apply to a whole lot of companies in the "necessities" department. They provide every bit of inflation hedge value Gold provides, but also provide dividend and stock appreciation.
cwkoss 5y ago
I would be very surprised if Bitcoin moved more than 100 percentage points downwards :-P But on a more serious note, this bet is based on the idea that if/as USD hegemony collapses (in ~decade time scale), inflation will accelerate and there is an increased chance that Bitcoin becomes world reserve currency. I believe Bitcoin volatility will decrease as price grows (it already has to an extent), and once it has about one more ~10x increase (reaching roughly market cap of total earth gold supply) the bubble/bust pattern will break and it'll become more stable. But who knows. I recommend keeping 1-5% of net asset value in cryptocurrency (BTC, ETH, maybe ADA if you like risk, roughly weighted by market cap and ignoring long tail of unproven coins), but it is certainly a very risky investment and securing them has unique technical challenges that make them less suitable for non-technicals.
Geee 5y ago
There are just two years in Bitcoin's history when it had a negative return: https://stats.buybitcoinworldwide.com/yearly-candles/ https://stats.buybitcoinworldwide.com/yearly-candles/
- pxue 5y ago
  That's what Ponzi scheme sales person would proclaim, until not true.
  - cwkoss 5y ago
    Discussing historical performance is ubiquitous among all asset classes. If you're going to try to argue that Bitcoin is a Ponzi scheme, at least put some effort into the argument. This is just lazy and simplistic.

throw0101a 5y ago

> If Bitcoin didn't exist, I would probably own more gold. Do you have any evidence that gold is a hedge against inflation, or are you simply following financial folklore? > We find little evidence that gold has been an effective hedge against unexpected inflation whether measured in the short term or the long term. The gold as a currency hedge argument does not seem to be supported by the data. The fluctuations in the real price of gold are much greater than FX changes. We suggest that the argument that gold is attractive when real returns on other assets are low is problematic. Low real yields, say on TIPS, do not mechanically cause the real price of gold to be high. While there is possibly some rational or behavioral economic force, perhaps a fear of inflation, influencing variation in both TIPS yields and the real price of gold, the impact may be more statistically apparent than real. We also parse the safe haven argument and come up empty-handed. We examine data on hyperinflations in both major and minor countries and find it is certainly possible for the purchasing power of gold to decline substantially during a highly inflationary period. When the price of gold is high in one country it is probably high in other countries. Keynes pointed out “that the long run is a misleading guide to current affairs”. Even if gold is a “golden constant” in the long run, it does not have to be a “golden constant” in the short run. Conversely, current affairs are possibly a misleading guide to the long run. * http://www.nber.org/papers/w18706 http://www.nber.org/papers/w18706

drcross 5y ago
If gold is not the mainstay of inflation hedgers why would it not be; maybe because people don't know with certainty that they aren't buying gilded tungsten or that virtual gold purchases could disappear at any time? Maybe crypto is the gold that gold could never be?
cwkoss 5y ago
I don't find this persuasive at all. Seems like they looking at this from an institutional perspective of hedging a single currency, looking for tight correlations over a short time periods. I don't care if there is a year or 5 of lag in either direction, or if gold outperforms currencies in a period in a non-correlated way. Funny that they quote Keynes because it seems like a superlatively Keynesian perspective on gold. I'm concerned about the simultaneous inflation of all fiat currencies that arises from adversarial currency wars to game trade flows and reckless Fed policy devaluing what's in my bank account as a hidden tax on saving. I want an asset that is resistant to devaluation of money and the historical examples of governments leaving the common man as bag-holders when a currency fails. I want something I could bury in the ground and feel confident that it'll be worth more when my grandchildren dig it up. Maybe in a pedantic sense, "gold is a hedge against inflation" is "folklore" because the correlation is loose over short time periods, but over long time scales it works pretty well. Until asteroid mining is prevalent (and possibly beyond that) an ounce of gold will likely continue being enough to buy a good suit.