By Michael Venuto, Co-founder & CIO, Toroso Investments
Last week, ETF Think Tank Contributors Michael Gayed and Mike Venuto traveled to their first in person investment conference since the beginning of the pandemic. The Money Show event brought investors and thought leaders together for three days of investment education and networking. Michael Gayed was there to discuss his intermarket analysis of the Lumber/Gold ratio; a copy of his award-winning white paper can be found on SSRN. Mike Venuto was also addressing gold in the debate with Adrian Day, on “Crypto vs. Gold.” A clip of the discussion can be found here. In today’s ETF Think Tank research note, we are sharing some of the key points from the “Crypto vs. Gold” debate.
An interesting factor in the “Crypto vs. Gold” debate is that both seek to solve a similar problem. However, few take the time to define this inherency. Gold was used as an original form of currency and monetary standard, but due to some deficiencies and the desire of governments to print money, it’s use as medium of exchange has diminished. Crypto was born out of the financial crisis of 2008 as a means to separate money from governments and/or trusted third parties. So in the end, both Crypto and Gold are sought out as solutions to a similar fear of government intervention.
As the first Crypto-currency, Bitcoin was born in 2009 in response to the financial crisis. There are three core attributes that support Bitcoin’s adoption as an alternative to fiat money. The first two are part of the code:
- Separate from a trusted third party (decentralized)
- Fixed Supply
The third attribute is more of a self-fulfilling paradox, in that the “network effect” has taken hold. Simply put, the Bitcoin network is now subject to the Lindy Effect:
The Lindy effect is a theorized phenomenon by which the future life expectancy of some non-perishable things, like a technology or an idea, is proportional to their current age. Thus, the Lindy effect proposes the longer a period something has survived to exist or be used in the present, it is also likely to have a longer remaining life expectancy. Longevity implies a resistance to change, obsolescence or competition and greater odds of continued existence into the future.
Wikipedia, Lindy effect, 5/4/21
As alluded to earlier, Crypto and Gold have some clear similarities, noted in the next chart:
The differences are quite stark as well. The potential of Crypto far exceeds, in our opinion, the limited, although historically proven utility of gold.
The true winner of the debate from allocation level is that investors should consider both Gold and Crypto. The reality is that both assets are volatile and uncorrelated. From a modern portfolio theory point of view, the return streams of both Gold and Crypto can be used to optimize a buy-and-rebalance portfolio. From the point of view of a speculator or a futurist, the unknown applications and value of Crypto and Blockchain technology far exceed the utility of shiny rocks that are easily stolen.
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