Why Peter Schiff is Wrong About Bitcoin

Euro Pacific Capital CEO Peter Schiff is a businessman, former US Sentate canditate, an outspoken critic of Bitcoin – and he’s completely wrong.

Not that Bitcoin is perfect, mind you – there’s plenty to criticise in what is still a developing project to completely reinvent money and financial independence as we know it. However, Schiff’s specific arguments don’t carry much weight.

An appearance on Joe Rogan’s podcast last year showed some fundamental misunderstandings of the cryptocurrency from the outset with Schiff arguing that Bitcoin is a bubble doomed to failure like the early internet venture, or the Dutch Tulip Bubble of the 1600s.

Schiff stated his belief that “Bitcoin mania” is based on the notion that Bitcoin will be widely used as a frm of currency in the future, and went on to compare the belief to a cult mentality.

Ironically, Schiff is an advocate of the use of gold and even owns a company called SchiffGold that buys and sells the precious metal.

As pointed out in a Forbes article, Schiff seems to have one standard for gold and anothe for Bitcoin despite the similarities in the reasons for buying and holding both commodities.

“It should be noted that the belief that gold will become a more widely-used form of money is also a huge part of the basis of Schiff’s reasoning for buying and holding the precious metal. Critics of gold bugs have often made the same argument Schiff is making against bitcoin here — but instead aimed at the gold market.”

Schiff also said that cryptocurrencies had no inherent value, and depended only on the value given to them by the community. This, of course, is true of any currency. The US dollar is unbacked by any commodity and has value simply because the value is mutually agreed upon, and while gold has a function as a conductor of electricity and applications in dentistry, the value of an ounce of gold does not reflect those use cases but rather the notion that gold is inherently valuable, which is arguably ass cult-like as Schiff’s idea of Bitcoin.

Comparing Bitcoin to gold in terms of supply, Schiff told Rogan that the supply should have no effect on the price action, which simply isn’t the case.

“They think ‘oh, there’s twenty-one million Bitcoins’, and they think that that means they’re scarce. Well, they’re not scarce, there’s so many other currencies out there, and it’s only scarce because… it’s coded to be scarce. Gold is scarce because it really is scarce.”

Bitcoin is recognised as a commodity by the SEC and whether the scarcity is artificially imposed or not, it exists. There is a finite amount of Bitcoin, and the code is secured in the most widely distributed blockchain network in the world. It’s a scarce commodity, and as with all commodities, the scarcity influences the price action.

Gold is arguably far less scarce than Bitcoin, mined for thousands of years and with new underground ore deposits found all the time. Space exploration could reveal huge amounts of gold off-world at some point in the future as well, but Bitcoin is programmed to a set number and the programming will not change.

“The only thing I can do with my bitcoin is give it to somebody else”

This is my personal favourite. That’s prety much the idea of currency, isn’t it? To be used, among othe things, as a medium of exchange? The only thing you can do with the US dollar is give it to someone else in exchange for goods and services. While Schiff argues that the US dollar has a form of forced backing in tax payments, meaning that US citizens are forced to engage with the currency in order to fulfill their civic duties, there are also darnket transactions that can only be carried out with Bitcoin.

This all boils down to the inherent value placed in the currency. Bitcoin is a valued commodity simply because people agree that it’s valuable. While the value is unstable, as Schiff correctly points out, at some point it’s bound to level off. Until then it has a use case both as an online digital currency and a speculative commodity.

From Forbes:

“This gets to a common theme in Schiff’s arguments against bitcoin where they can almost always also be applied to gold. Sometimes the argument applies even more harshly to gold. After all, how many online merchants accept gold payments?”

While an argument could easily be madethat Schiff is simply shilling gold and trying to badmouth what he sees as the “competition” for a true global currency, he strikes me personally as sincere in his views.

His father was a tax protester who lost multiple court cases against the US government arguing that the US Tax Court is not a real court and that IRS taxation was unconstitutional.

He sentenced to 13 years, and wrote a book called The Federal Mafia while incarcerated – he died in prison at age 87.

Schiff followed in his fathers footsteps in certain regards, insisting that the US dollar is going to collapse and that people should have their own government-secularised currency to prepare for that eventuality. It makes sense that he would view Bitcoin as a threat to the status of gold in his mind, which explains why he has been an outspoken Bitcoin critic for years.

Perhaps he is a shill mindfully trying to do damage to the public perception of Bitcoin regardless of whether it has a greater use case as a global currency than gold, and perhaps his heart is in the right place and he genuinely believes his critique of Bitcoin and its many failings.

Either way, the arguments he makes against the cryptocurrency are fundamentally flawed, misinformed, and blinkered to the fact that apply to gold just as well or better in some cases. His persistence in slamming Bitcoin does, if nothing else, raise the interesting question of whether gold and Bitcoin can both co-exist and cater to different needs without an overlap leading to competition between the two commodities – the old and the new.

Remember folks, Crypto is comin!

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Interested in other cool crypto posts….check out Uncorrelated assets, the “holy grail” of portfolio allocation.and The Price of Bitcoin vs Cost of Mining.

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Bitcoin: Uncorrelated assets, the “holy grail” of portfolio allocation.

When it comes to investments of any kind, it’s important to understand how the assets in question are related to others on the market. The relationship between the price of different assets,  or “correlation” as it’s called in investment terms, is crucial to determining the overall risk your portfolio may have. You could think of your portfolio as heavily diversified, but if the sectors you’re invested in are highly correlated (when assets move in the same direction at the same time), the overall risk could much higher than you initially thought.

In the cryptocurrency world, Bitcoin and altcoins (other cryptocurrencies) have always had an interesting relationship, shifting from highly correlated to negatively correlated (when asset prices move in the opposite direction at the same time). This is to be expected since most investors first enter the crypto rabbit hole through Bitcoin and eventually have the curiosity to start branching out into altcoins. Once in crypto most investors just alter the weight of their Bitcoin,  altcoin and USD exposure depending on market conditions, hence the correlation. For the majority of 2017, all Cryptocurrencies were highly correlated, moving in unison, until the last few weeks when news of a potential Bitcoin ETF started to gain momentum which helped push the BTC price to all time highs.

That said, while cryptocurrencies have a high degree of correlation with each other most of the time, they haven’t shown to be affected by the trading price of other traditional asset classes like gold, stocks, real estate or commodities, etc. As an uncorrelated asset class with more and more onramps for retail and institutional investors, cryptocurrencies and Bitcoin in particular, offer interesting opportunities for savvy investors. When correlated markets due for a broad decline impact each other and set off a domino effect, the price of Bitcoin is not necessarily affected at all, allowing traders to offset risk by allocating a small amount of their total investment portfolio to the top cryptocurrencies. This can reduce the overall risk of a portfolio while increasing expected returns…the “holy grail” of investing.

By having a basket of uncorrelated, or negatively correlated investments, it is less likely that your investments will suffer a catastrophic loss in the event of a major downturn or a financial crisis.

Burton Malkiel, the author of “A Random Walk Down Wall Street” and investment guru Ray Dalio, founder of hedge fund Bridgewater, both credit uncorrelated investment strategies for some of their success in investing.

Bitcoin as an uncorrelated asset

Bitcoin offers traders a lifeboat when things turn rough by being uncorrelated to the stock market – largely. Fundstrat’s Thomas Lee is one analyst to point out that the VIX, AKA the stock market’s ‘fear gauge’ is arguably correlated with Bitcoin’s price movement.

However, while Lee acknowledges that it’s possible Bitcoin may be ‘predicting’ the stock market to an extent by mirroring the VIX before it happens, the connection to the actual price movement in the stock market is “really, really limited.”

“In the past 12 months, not only did we have a strong rally in equities, we had a strong rally in cryptocurrencies. I wouldn’t be surprised if those investors who saw risk-on assets everywhere outperforming globally were also buying cryptocurrencies.”

“Cryptocurrencies have their own economy based on activity on that Blockchain. Equities have their own economy based on earnings per share multiples. The institutional overlap is essentially zero.”

Lee has also produced findings showing that Bitcoin is not only uncorrelated to many asset classes, but actually negatively correlated to others like gold due to the “cannibalization of the demand for gold”.

Datatrek analysts agreed with Lee, stating:

“Since investors have only one brain to process risk, they will make similar decisions about cryptocurrencies and stocks when they see price volatility in the latter.”

Meanwhile, Morgan Stanley analysts have voiced the opinion that the correlation is due to traders escaping stock market dips by converting their holdings in and out of Bitcoin, leading to a mild connection between both markets without Bitcoin actually impacting mainstream stock prices.

However, it’s exactly that kind of behavior that could lead to the two markets being more strongly connected in future. An Octagon Trading trainee stated:

“As for it being indirectly related, I would say that BTC is considered to many as a hedge against currencies, similar to that of gold. Therefore, if the demand, recognition and acceptance of BTC becomes much larger, there is a chance it would be in a similar position to that of gold and the stock market.”

So how does this help your portfolio?

Thomas Lee didn’t just make a passing comment about the interaction between the stock and cryptocurrency markets – in his presentation entitled ‘Economics of Cryptocurrencies’ at Upfront conference he dug a lot deeper, producing some very interesting information.

The Fundstrat analyst found that while a 60:40 stock/bond equity portfolio allocation tended to gain 6.42% over three years, a portfolio split 58:60:2 between stock/bond/Bitcoin led to an 8.73% increase, over 2% more with the addition of Bitcoin.  Pushing the Bitcoin split to 5% led to even greater gains over three years, almost doubling the returns on a stock/bond blend and actually reducing profit volatility despite the volatile reputation of Bitcoin.

While Bitcoin also gained negative press over the years from people going ‘all in’ on what many viewed as a fad with some even mortgaging their homes to invest in Bitcoin, Lee states that “you don’t have to bet your firm on crypto to see uncorrelated alpha”.

Uncorrelated Alpha

Alpha is the portion of a portfolio’s return that cannot be attributed to market returns, and is thus independent from them. Exposure to alpha is equivalent to exposure to idiosyncratic risk.

Beta, on the other hand, is the return generated from a portfolio that can be attributed to overall market returns. Exposure to beta is equivalent to exposure to systematic risk. Systematic risk refers to the risk of a collapse of the entire financial system, the type of risk that most assets can’t avoid. As in, if the US government collapses tomorrow, you can bet your ass that everything and I mean everything from stocks, bonds, commodities and and real estate will collapse right alongside it.

So while beta is essentially exposure to more predictable and interconnected market risks, uncorrelated alpha is earnings gained from returns generated outside the normal boundaries of the risks associated with the traditional market, a very rare thing indeed. Traders are now looking to Bitcoin to generate these returns due to its loose connection with other financial asset classes.

Grayscale investor Michael Sonnenshein said in 2017:

“Bitcoin is uncorrelated alpha. This is the holy grail of investing.”

Grayscale puts out the GBTC Bitcoin fund which trades $400 million over the counter, an amount equivalent to that of McDonalds.

Uncorrelation a Buy Signal?

As always, it’s important to do your own research before making an investment in cryptocurrency or anything else for that matter. What I will say is that crypto has currently no correlation to either stocks, bonds, gold and hedge funds, which may be a a serious buy signal for investors that have not yet entered the market.

Many investors and portfolio managers are agnostic to the actual assets that they allocate in their portfolio, that is to say they aren’t so focused on the micro/industry specific factors pertaining to the asset class they are investing in but the returns and how they integrate with the rest of their portfolio. As a consequence of this, as long as crypto continues to be uncorrelated we are likely to see a growing interest from portfolio managers and investors.

For almost a decade now the cryptocurrency boom has been a retail investor phenomenon led by individual investors flocking to this new and emerging technology. While many flocked to cryptocurrency as a means of making their first investment, an investment in something relatively unconnected from the world of traditional finance, those invested in stocks and bonds may do well to consider the inclusion of Bitcoin or other cryptocurrencies for a more diverse portfolio that will offset the beta risk associated with those asset classes. As the industry matures by creating more investment vehicles from fiat currencies to cryptocurrencies, like the previously mentioned Bitcoin ETF, and reduces the risk of custody for institutional investors, well…what does the crypto community call it “moon lambo”…or something like that.

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Interested in other cool crypto posts….check out Mining Wars: Bitmain vs Dragonmintand The Price of Bitcoin vs Cost of Mining.

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