Since Donald Trump became President Elect, the price of Bitcoin has been surging higher. This has caused further excitement in an extremely volatile and speculative asset class. Although most of our more tenured clients don’t likely have much interest in this space, we realize your children and/or grandchildren, and some of our younger clients may be interested in digital assets. Our sincere hope is that the info we provide in this missive will help them to make an informed decision before rushing blindly into crypto, or any other investment fad that will inevitably come our way. Here’s our take on today’s current crypto enthusiasm:
Bitcoin, like Gold, is a ‘non-productive’ asset. That simply means that these assets do not now – and will not ever – produce anything. Non-productive assets have no internal rate of return, they therefore lack any intrinsic value. Those who own non-productive assets believe (or hope) there will always be somebody who is willing to pay a higher price for that asset than what they paid for it… Without any fundamentals whatsoever driving those future price increases. This is known as the ‘greater fool theory,’ and it never ends well. Could it be different this time? Perhaps. But consider the following history, starting with the last gold frenzy that peaked in 2011:
From January 1, 2001 to August 2011, the price of gold bullion soared from $265 USD per ounce to over $1920 USD per ounce. Investors back then were allocating significant portions of their investable assets to gold. Ads for physical gold (and gold ETFs) were everywhere. Perma-bears and the usual prophets of doom were dominating the airwaves, claiming gold was the only rational choice for investors.
As usual, I looked to Warren Buffett for advice. He said productive assets would always beat non-productive assets in the long run. Take a look at this clip of Warren Buffett speaking to this, right around the time gold was peaking, after more than a decade of surging gold prices. You’ll also hear Buffett refer to Exxon in this clip. Remember when ExxonMobil was the most valuable company in the world? Peak oil theory was another thing going on at the time – but that’s a story for another day…
https://youtube.com/shorts/XKcBtHByEkg?si=V4hE3xY2ZbxnV3w-
Over the next 13 years, Gold went on to produce a return of just 2.74% per annum. Now, that wasn’t a very good hedge against inflation, was it? Let’s compare that to the return of US equities during those same 13 years. The S&P 500 went on to produce an impressive 11.28% return. Wait a minute! Let’s not forget all those dividends that were reinvested over those same 13 years. The total return with dividends reinvested was an even more impressive 13.34% per annum.
My theory is this: What Gold is to Baby Boomers, Bitcoin is to Millennials and Gen Z’s. While we don’t have a very long history for Crypto assets, we do have a very long history for Gold. See the chart below for Gold vs the US Stock Market over the past (almost) 45 years, pitting a non-productive asset class (Gold) versus a productive asset class (Equities):
*As you can see, over almost 45 years it’s not even close. U.S stocks have gone up 52.4 times vs Gold’s 3.3 fold increase. (Inflation has gone up 4 times)
*The price of the S&P 500 in this chart ignores 45 years of dividends, if only in an attempt to be fair to gold, which of course doesn’t pay dividends, interest, or anything else. (Neither does Bitcoin for that matter)
*Eight hundred dollars invested in the S&P 500 in January of 1980 and left to compound, would be worth around $129,079 today (Dividends reinvested) Compare this to Gold’s current price of $2,649 (As mentioned, gold produces no dividends to reinvest…)
Now back to the bitcoin mania… It is worth mentioning that some of the businesses you own in your portfolios with us, have indeed benefitted from the proliferation of bitcoin and all of the other 2.4 Million cryptocurrency tokens that have been “minted” to date. Companies like Nvidia and AMD are good examples. Before the Artificial Intelligence explosion, these chip manufacturing businesses were already making record profits as demand for their chips skyrocketed in part, due to all of the nonstop mining of all of those cryptocurrency tokens. (Crypto mining requires an ENORMOUS amount of computing power.) The share prices of these businesses were rewarded with absolutely explosive returns.
Productive businesses like the aforementioned, that sell actual products and services that consumers actually want and need, produce actual revenues and profits which every true investor actually wants and needs. We firmly believe that a properly diversified equity portfolio will produce superior returns over an investing lifetime. Far superior to the returns that any crypto tokens or precious metals are likely to produce.
None of this is new. There have been countless other speculative frenzies that have blown up spectacularly. Here are just a few of the big ones for you very briefly:
*The Tulip craze in 1630: Tulip prices were selling for ten thousand guilders at their peak. (This was roughly the price of a mansion on the Amsterdam Grand Canal!) The tulip bulbs went on to lose 99% of their value when that bubble inevitably burst.
*The South Sea Bubble of 1720: Sir Isaac Newton, arguably the smartest person in the world at the time, invested in the South Sea Company – nearly at its peak! After its collapse, Sir Isaac lost the bulk of his sizable fortune. Apparently, gravity applies to asset prices as well as to the motion of the planets… (see what I did there?)
*The 1980’s Japanese stock and real estate bubble: Perhaps one of the biggest financial bubbles ever. From 1956 to 1986 land prices in Japan increased by 5000%. The bubble ultimately burst and it took the Japanese market around three decades to recover.
*The 1990s dot com bubble: (I started my advisory career in the mid-nineties, so this was my first opportunity to witness a truly massive bubble firsthand!) The Nasdaq lost over 82% of its value when that bubble finally burst. It took a full 15 years for the tech-heavy Nasdaq index to recover from the losses.
*The US housing bubble, which grew for a decade and then collapsed in 2008, caused the financial crisis and the Great Recession. Bear Stearns and Lehman Brothers went to zero.
* 2022: The rise of meme stocks and NFTs (Non-Fungible Tokens). Those bubbles ultimately collapsed as interest rates skyrocketed and inflation hit 40-year highs. In November of 2022, FTX, a very popular Cryptocurrency exchange, also collapsed, and $32 Billion evaporated in a matter of days.
By now, you probably get the point I’ve been trying to make and why we proceed with extreme caution toward any asset class or trend that attracts so much enthusiasm.
Who knows what the ultimate outcome of all of this speculation will look like decades from now? We would never claim to know exactly what the future has in store for cryptocurrencies. What we do know is this – the appropriate amount of speculation, or gambling, our team of Financial Planners will engage in on behalf of our clients is precisely zero.
Thank you, as always, for your confidence in us and in our approach.
