What is the best buy?

Don’t look now, but the Bitcoin is digital gold argument is coming back. During the cryptocurrency market crash, no one wanted to hear that bitcoin was digital gold because the price of bitcoin was plummeting. But now that the worst of the cryptocurrency market sell-off seems to be behind us, and the price of bitcoin appears to have stabilized around $20,000, traders are once again talking about bitcoin as a potential asset. sure.

Adding fuel to the fire, Ethereum co-founder Vitalik Buterin recently suggested on a Twitter thread that “crypto is the best bet” over gold. Buterin’s remarks go even further. It widens the net to include all cryptocurrencies, not just bitcoin. And he suggests that crypto is, most likely, a superior investment to gold during a time of market uncertainty. Buterin right?

Three arguments in favor of crypto

Vitalik Buterin broke down his argument into three succinct points. Two of them, quite frankly, don’t sound very convincing. For example, Vitalik Buterin suggested that gold does not offer the same types of “safe storage options” than the digital world. I don’t know about you, but gold seems pretty safe to me.

Buterin also suggested that gold is “not very practical” and “difficult to use” in the business. That seems like a better argument, because just about everyone can agree that pressing a button on their phone to send crypto anywhere in the world is much easier than lugging around a few gold bars to make a move. transaction. But that doesn’t mean crypto is a better investment than gold.

The third argument, however, is the one that really stuck with me. Vitalik Buterin suggested that “gold is less adopted” than crypto. Looking at the bigger picture, there are more people who own cryptocurrencies than physical gold, which gives them some security. Some 145 million American adults say they own cryptocurrencies or have invested in cryptocurrencies in the past. This represents 56% of the American adult population.

Are cryptocurrencies becoming more and more like gold?

The digital gold argument worked as long as it did because bitcoin seemed to be uncorrelated to any other asset class, meaning its price didn’t move in the same way. than other investments. However, as we saw in 2022, bitcoin is correlated, at least weakly, with the broader market. In other words, bitcoin has the potential to go down when stocks go down. Consequently, it lost some of its appeal to investors at the start of the year.

But look at what’s happening in the financial markets right now in terms of volatility. Almost everyone agrees that bitcoin is less volatile than it has been. Some traders even call bitcoin boring. If bitcoin’s declining volatility is a long-term trend, that would make it a much more attractive investment, right?

Second, bitcoin is now much more correlated to gold than it has been for a long time. The correlation between bitcoin and gold is at its highest point in 40 days. This is admittedly a very small sample, but it does suggest that traders around the world are trying to figure things out and that relationships between asset classes may be changing.

The battle to become the global safe-haven asset

At a time when many people are nervous about tech stocks and the market in general, is it really possible for crypto to become a safe-haven asset? Will people who are worried about their money and their savings really prefer crypto to gold?

Note that Buterin did not say that “crypto is a better investment than gold“. What he said was that “crypto is the best bet“. I don’t think he’s referring to a casino type bet here. Instead, he framed it in terms of game theory. Buterin got into crypto via the world of multiplayer online games, and in the past he has made arguments suggesting that he views financial markets as some kind of broad, similar multiplayer game. This is a game where cooperation is key, but where communication and trust can be non-existent. It requires knowledge of game theory to be successful.

Based on this, I think Buterin is really suggesting something along the lines of the following: Since it is impossible to communicate directly with market players around the world to find out what they are thinking, and since the range of possible future outcomes is incredibly wide, crypto seems to be emerging as the asset with the highest probability of future success.

For now, gold is obviously a much safer investment than all but a handful of cryptos. But this is where things get interesting, as cryptos like Bitcoin and Ethereum could emerge as potential safe havens for nervous investors. Investing in crypto is always risky and volatile, but if relationships between asset classes continue to shift, it might be worth considering whether now is the time to hedge your bets with some crypto.

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