Good as Gold?

Mike Zaccardi

MY THREE FAVORITE words in response to questions about investing and trading: “I don’t know.”

Nothing underscores that sentiment more than bitcoin and other cryptocurrencies. I work on a trading floor, where it pays to have an opinion on just about every tradable asset. But I’m the oddball on the floor. I roll my eyes when I hear blanket market predictions and the latest hot stock tip. I’m even on a personal crusade to remove CNBC from the TVs at work. But let’s leave that for another day.

I don’t have money on the line in bitcoin or any other crypto. I don’t have even mild feelings about where bitcoin is headed. I do, though, have a keen interest in investments. After all, I’ve dedicated years of my life to learning security analysis and portfolio management.

I find that while I have little interest in picking stocks or other assets for my own portfolio, due to my awful behavioral biases, I actually enjoy going through the grunt work of analyzing data and trends to come up with investment recommendations for others. I feel I’m less biased when I don’t have skin in the game.

So what does the future hold for bitcoin? I take a fear and greed approach to fundamental analysis, then weigh the evidence to come to a conclusion. Let’s start with fear. I have three concerns with cryptocurrencies:

  • Volatility. There needs to be some form of stability, or at least a cushioning mechanism in place, so individuals have confidence they won’t wake up one day to find their net worth down 20% simply due to trading action.
  • Security. In the crypto world, there have been too many instances of accounts being hacked and even an entire exchange going kaput. Perhaps the blockchain can help with this down the road, but we don’t appear to be there yet.
  • Consolidation. There are too many digital currencies out there, and there seems to be a new one every few weeks. The market needs to settle on which are legitimate.

If you recall from your econ 101 days, there are three facets that define a currency: as a medium of exchange, as a store of value and as a unit of account. For cryptocurrencies to truly take hold, arguably they need all three qualities:

Medium of exchange. I find it ironic that the most fervent investors in bitcoin are also those least prone to using the currency as a medium of exchange, because doing so is essentially selling. Think about it: You have three bitcoins and you want to buy a new car. You must sell the digital currency and buy the car.

Obviously, we have not yet reached the stage where you can simply walk up to a merchant and pay with bitcoin. Maybe there are a few who are accepting payment with crypto, but let’s just say I can’t yet visit Target and buy my weekly groceries with bitcoin.

Store of value. A benefit to a cryptocurrency is that it isn’t physically perishable. Still, we have seen instances of bitcoin vanishing from people’s accounts, so I don’t think it yet counts as an adequate store of value.

Unit of account. Maybe bitcoin meets this hurdle. Maybe. We can quote the cost of an item in bitcoin. For example, in my new car reference above, a fully loaded Toyota Camry might cost upward of three bitcoins. The problem is, a month from now, it may be two bitcoins or four. Quite a swing. That kind of volatility can exacerbate buyer’s remorse and create other behavioral traps. I know I’d feel awful if I exchanged bitcoins for goods and services, only to see bitcoin double in value over the next few months.

Now, let’s analyze the greed aspect of bitcoin. The adoption of a new technology has been described as having five stages. As investors, we want to make money, which means we want to be early to the party—and we want to be confident that the party is far from over.

If bitcoin can solve the issues outlined above, there will likely be significant price appreciation. How much appreciation? Cryptocurrencies don’t pay dividends or generate free cash flow. The financial analyst in me gets frustrated knowing there’s no discounted cash flow valuation to do.

We can, however, approach the valuation question by comparing cryptocurrencies to other assets. With bitcoin’s current market capitalization near $180 billion—and the entire crypto market cap at around $250 billion—bitcoin is worth about 2% of gold and barely registers when compared to all the money in the world.

Bitcoin is also worth a paltry amount compared to the largest companies in the S&P 500. With all the news of the latest “trillion-dollar club” stocks, bitcoin resides far from that psychological round number. It would seem that, if bitcoin gained more legitimacy, it could certainly close the total valuation gap versus gold and other assets.

The move away from metal and paper currency is clearly happening. Just look at Visa and Mastercard. Those companies crushed it during the 2010s, with their stocks returning 545% and 671%, respectively. The next logical step would be for us to carry not physical credit cards, but instead have some form of electronic storage of our credit. But will bitcoin be it?

Mike Zaccardi is a portfolio manager at an energy trading firm and a finance instructor at the University of North Florida. He also works as a consultant to financial advisors on an hourly basis, helping with portfolio analysis and financial planning. Mike is a Chartered Financial Analyst and Chartered Market Technician, and has passed the coursework for the Certified Financial Planner program. His previous articles were Keep On Keepin’ On and If Only. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn and email him at

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3 years ago

Since bitcoin is inferior to traditional money on all three dimensions – it’s a poor medium of payment, a poor store of value (the volatility shows that), and a poor unit of account (ditto), why does it persist? The “fundamental value” of bitcoin and other cryptocurrencies seems to be that they hold out the prospect of truly anonymous payments that are invisible to law enforcement. Traditional money runs through banks, which allow payments to be traced and are subject to ever more extensive controls designed to block money laundering. If you are engaged in criminal activity, espionage, or nuclear weapons proliferation, you want to avoid all that, and bitcoin can be very helpful. That gives value to bitcoin, despite its manifest shortcomings as a currency for most purposes. To the extent law enforcement can break through the anonymity of cryptocurrencies like bitcoin, however, we should expect their value to go to zero. That’s not to say that digital currencies and payment systems couldn’t exist, however, and some central banks are exploring how they could be set up.

Doug K
Doug K
3 years ago

my understanding is Bitcoin and similar cryptocurrencies solve problems for libertarians and criminals. The libertarian problems are invisible or incomprehensible to normal human beings. The criminal problems can be solved by well-established money laundering services instead – casinos, real estate a la Trump, etc.

One of the best coders I know called it ‘Beanie Babies for ultra-libertarian math nerds’.
That’s the best description I’ve seen.

Bruce Schneier:

What blockchain does is shift some of the trust in people and institutions to trust in technology. You need to trust the cryptography, the protocols, the software, the computers and the network. And you need to trust them absolutely, because they’re often single points of failure.

As a software engineer I do not trust the software..

Rick Connor
Rick Connor
3 years ago

Mike, Nicely written article on a tough subject. I did a fair amount of reading on cryptos a year ago and couldn’t figure out what to do with it in a portfolio.

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