The Crypto Limbo - How Low Can They Go?

By now, you are familiar with the volatility associated with cryptocurrencies, as it was on display last month, especially over the weekend, with Bitcoin down over 20% on some exchanges and 50% on others. I was initially alerted when glancing at Twitter, with multiple "Crypto Bros" lamenting the loss of cryptocurrency assets due to margin calls. Unbeknownst to me, people are allowed to secure loans to purchase crypto assets with leverage ratios up to 100:1. I believe this is part of the volatility levels seen in the crypto space. When prices drop, there is often an avalanche of forced selling to cover the margin loans many people used to purchase crypto. Precious metals have proven to be a relative haven of stability in comparison to this.

As recently as November 8, Bitcoin was at $68,429. By December 3, it had fallen to $57,642. On Saturday, December 4, while most financial markets were closed, Bitcoin dropped to below $43,000, even reaching $28,800 on the global Huobi exchange before recovering somewhat. Today (December 6), on most exchanges in the United States, Bitcoin has recovered to $51,000. That is a wild ride and offers those invested in that space a full range of emotions from one moment to the next and the opportunity to make or lose a lot of money in just a few hours. Bitcoin promoter Max Keiser famously reiterated his projection on 11/8/21 that Bitcoin would reach $220,000 by December 2021. While three weeks remain before the end of the year, Bitcoin is currently only 23% of that price. Those who responded to this information by purchasing Bitcoin a month ago have lost over 1/4 of their value.

Downward price volatility is not the only way investors can lose assets in the crypto space. Electronic theft is another way. Following an unrelated $600 million crypto heist in August, another $150 million was stolen over the weekend from the prominent crypto platform BitMart. Many different cryptocurrencies traded on the platform were affected by this theft. It is unclear what happens to those with existing margin loans against those assets, but someone is currently left holding many empty bags. Just as precious metals are much less volatile than most crypto assets, metals stored in professional vaults are also much more secure than crypto assets stored at professional exchanges. A quick google search for "precious metals stolen from a vault" will not yield many examples compared to the number of crypto thefts that have occurred. 

Cryptocurrency advocates sometimes talk about using crypto as a hedge against inflation. Certainly, if you are adept at trading and know when to purchase and sell each coin, you can sometimes beat inflation. But for those looking for a stable way to keep up with inflation over time, precious metals offer more security and certainty at any point along the journey. It is hard to have a reliable inflation hedge with assets that lose 25-50% over the weekend, even if they eventually make some of the losses back. Those who took action from Max Keiser's comments a month ago are significantly underwater today. While there has been a meteoric rise in price since the founding of Bitcoin, over 55% of those who own Bitcoin today made their initial purchase less than a year ago.

With new CPI numbers due to be released Friday, inflation continues to affect consumers today around the world. Along with higher-than-normal inflation levels, we also have a slowing economy to deal with as well. More Chinese ports are being shuttered temporarily in response to Covid-19 cases emerging in the region. This further slows down international trade, which in turn slows down local economies while simultaneously leading to higher prices - as consumers compete for fewer available goods. This environment of "stagflation" has historically been a boon for gold and silver, making them among the best performing assets during similar periods previously. Since this condition is somewhat rare and doesn't happen often, most crypto assets have never experienced a prolonged period of stagflation. If recent performance is any guide, continued volatility and risk to the downside are certainly in the mix.

At current price levels for precious metals, evaluating the risks between assets such as equities, bonds, crypto, and precious metals makes sense. With higher energy prices and less friendly mining regulations gaining momentum worldwide, a strengthening floor is developing under the price of precious metals. Steve St. Angelo of SRSroccoReport.com has recently provided an update on the upcoming challenges in the energy sector, in this podcast interview. With diminishing grades and quantities of energy available pushing energy prices higher, the costs to mine and refine precious metals will also rise. Unlike cryptocurrencies that require continued energy consumption to exist in the future, gold and silver require no further energy expenditure after the initial refining process.

The performance of crypto assets has somewhat tracked the technology sector's performance. As the appetite for risk assets begins to wane, crypto tends to come down when technology stocks decrease in value. Whereas the inflation seen over the last several years is mainly reflected by inflated asset prices (stocks, real estate, etc.), the inflation of the immediate future will be exhibited by higher costs for food, energy, and consumer goods. If history is any guide, it will also lead to lower stock prices and higher gold and silver along the way. The current prices for gold and silver offer tremendous value, compared to the inflated asset prices available in other investment categories.

The amount of leverage involved in the crypto, real estate, and stock market right now offers an additional risk factor to consider. When margin calls begin to roil crypto or stock markets, it also affects people trading in those markets without leverage. Those holding physical ounces of gold, silver, and/or platinum in a professionally vaulted account are protected against physical theft, margin calls, and the loss of purchasing power as inflation continues to be a factor. Precious metals are currently among the most discounted assets available, compared to categories such as crypto, stocks, and real estate in certain areas. Even though a case can be made for owning all these assets to a degree, I believe the most substantial case today can be made for owning precious metals.