Bitcoin and Ethereum: are they good investments?
We all see the money moving into the digital currency markets but it’s not yet clear where the money is coming from or why. Some analysts think that investors are taking money out of gold and pointing it to the digital currency markets. I have never considered gold to be a very conservative investment. Its price fluctuates more than I think it should.
There are about 165,000 metric tons of mined gold in the world. We are pulling about 2500 metric tons of gold out of the Earth every year. It’s not clear how long that level of production can be sustained. In economic theory we need to produce more gold each year as we find new uses for it, or as demand for available gold increases. For example, as the human population grows the demand for gold fillings in teeth and gold jewelry increases. It doesn’t help that we bury a lot of our gold with our dead. About half our gold is used to make jewelry.
It follows that the demand for gold is probably exceeding the supply, and therefore the price of gold should rise. But as I write this gold is selling for around $1200 per ounce. Only a few years ago it was selling for $1600 per ounce. That the price of gold could decline even as demand outstrips supply suggests that we have been paying too much for gold and probably so for a long time.
So if people are now selling gold to buy Bitcoin or Ethereum, what does that say about the value of those digital currencies? At least with a gold ring if you are evicted from your home you can take the ring and sell it to buy food. With digital currencies if you lose power to your home you cannot spend your accumulated worth. Yes, you could drive down to the coffee shop and plug your computer into the outlet there and access your Bitcoin and Ethereum wallets, but what if a tornado rips through your town, destroys the computers, and takes out the coffee shop? Well, your gold may be buried in the rubble and you’ll never see it again but you should eventually be able to log onto the Internet again.
In a sense, digital currencies are more sustainable than gold. The blockchain technology ensures that no matter how many people are affected by a natural disaster their money is still accessible. And we do not bury digital currency with anyone, although it is possible that someone could die without leaving instructions for how anyone could get into their digital currency accounts. Maybe some lost digital currencies could be recovered years in the future through a special auditing process, although I think that unlikely. It’s just not clear to me that Bitcoin is any more safe of an investment than gold.
So why are people buying so much Bitcoin now? Like gold, neither Bitcon nor currency create any value. They don’t produce goods and services the way companies do, and when you invest in stocks you are buying into the ability of a company to produce goods and services as well as to sell those goods and services. The productivity literally creates new wealth, although the wealth may not exist for long (food, for example, is eaten and cannot be reused or resold).
I don’t doubt that the growth in value has potential. But that growth will come from more dollars and Euros chasing the Bitcoin and Ethereum, which are only produced in low volume per transaction. The growth you see in these kinds of investments is due to what I call investor-driven inflation, which is easily reversed when the investors abandon a strategy because they are not making any money. As soon as demand for a digital currency falls the price falls.
We should be making smarter investments with our money. Demand that is driven by greed or fear is very different from demand that is driven by need.