It is hard not to speculate at all.
It is an itch we have to scratch.
I say scratch it and move on but be prudent and only speculate an amount such that there would be no consequences if you lose it all. We should not risk our retirement funds for speculative plays.
Recently, I had this itch and in this article, I am going to tell you how I’m going to scratch it.
It Started With Massive Money Printing
Covid-19 created an upheaval to the global economy. The US Fed’s solution is often to print a lot of money and flood the market with the liquidity through a process known as Quantitative Easing (QE).
But this time it’s a little special. The situation was so dire that the Fed did something they have never done before – UNLIMITED QE (previously there were always budgets). They bought up junk bonds and stocks via ETFs. The Fed’s assets swelled to almost US$7 trillion.
You can see the chart below – the steep jump from US$4 trillion to the current levels took place in 2020 alone. This dwarfs all previous QE programmes. It even made the 2008 stimulus looked like an insignificant bump.
We have never seen such a situation before, and there’s nothing in history that can tell us what would happen next.
I don’t profess I have the answers.
But we can already see some effects of this massive liquidity.
#1 – US interest rates are at an all time low.
#2 – US stocks are at all-time high.
#3 – US real estate prices are at all-time high.
#4 – USD is weakening
#5 – Gold has broken US$2,000
#6 – Bitcoin has got back to near US$12,000
Asset values have increased across the board as more dollars are chasing the same amount of assets. Demand increased while supply stayed the same – prices go up.
So how can I speculate in this?
My main investments are in stocks and are meant for long term wealth building. So I wouldn’t speculate using my main portfolio.
Properties are not my cup of tea so I leave it to the others. I would be easily beaten since I don’t have an edge in it. Moreover they are too big a bet to speculate.
That leaves me with gold or cryptocurrencies.
I have some gold bars and silver coins but they are meant to be hedges when all things fail – stocks and bonds couldn’t be sold when exchanges and banks are closed. Properties cannot be carried away. Cash may be worthless. Physical gold and silver packed a lot of value in a small volume and that means they are ideal portable wealth candidates.
We really don’t know what will happen to the world. So, I will not touch my gold bars and silver coins since they are meant to hedge against the worst case scenarios.
So that leaves me with cryptocurrencies. And Bitcoin is the leader of the pack because it was the first to be introduced.
Bitcoin is a relatively new asset compared to precious metals. I see it as an effective way to hedge against a falling USD too.
In fact, it was born out of the mistrust of the fiat currency in 2008. Quoting the Bitcoin white paper,
“The root problem with conventional currencies is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
This quote still rings true today. The US Fed has launched several QEs after the 2008 financial crisis and the biggest during Covid-19.
In fact, I think Bitcoin can even be a better hedge than gold. This is because you simply do not need to carry it around like physical gold and silver. Even though I labelled physical precious metals as portable wealth, they wouldn’t be light if you had a bag of them. Moreover, you may attract robbers and suspicion at custom checks. Bitcoin doesn’t lead to such problems. You can travel anywhere and start afresh with your Bitcoin as long as you have your private key.
Personally, I would prefer Bitcoin. Like gold, the mindshare is irreplaceable. Some argued that silver is better because it has more utility than gold. But brand recall is a powerful thing – you would think of Coca-Cola when it comes to soft drinks, and dotcom for domain name extensions. Gold is what you think of when it comes to precious metals. Not silver. Not platinum.
Ethereum has more utility than Bitcoin. If Bitcoin is like gold, Ethereum is like silver. Hence, I would speculate on Bitcoin if I have to choose one. The fact is that I recently bought both of them but more money went to Bitcoin.
I think there might be more upside for Bitcoin than gold.
All the world’s gold is worth around US$8 trillion while the market capitalisation of Bitcoin is at US$117.8 billion.
Granted, it could be a case where institutions and governments would rather buy gold than Bitcoin. But the supply can also soak up the demand easier than Bitcoin could.
There isn’t anything wrong speculating on either. In this case, I am very aware that I am buying for price gains and not for hedging. So I must be able to lose what I have betted. Just wanted to put some money behind my views.
I know there’s a growing interest in gold and a lesser degree, cryptocurrencies. But it is important to know if you are investing, hedging or speculating. If you are buying gold or Bitcoin for hedging, you should not sell regardless what the prices are. If you are speculating for price gains, don’t invest your retirement funds such that you cannot handle the consequences if the prices go south.
All the best!