In 2016, hackers stole 119,756 Bitcoin from Hong Kong-based cryptocurrency exchange Bitfinex. CNBC created a 45-minute documentary about the hack that can be viewed here. In February 2022, the Justice Department seized more than 94,000 Bitcoins allegedly linked to the hack. At the time of the hack, the value was $72.3 million. The value of the recovered Bitcoins was $3.6 billion. The total value of all Bitcoin would have been $4.5 billion at recovery time. Bitcoin has since lost more than 55% of its value. The current value of the stolen coins is around $2.02 billion.
Customers are in a legal battle with Bitfinex over the legal owner of the recovered Bitcoin. On the recovery day, Bitfinex publicly stated that the Bitcoins belonged to the platform. Bitfinex believes it has already compensated the hacked customers for their loss. The company did several very questionable things. The first thing Bitfinex did was generalize all losses by 36% across all accounts on the platform, not just the hacked accounts. (Think about that for a second. It would be like VISA got hacked, and several accounts were compromised. Instead of working to fix the affected accounts, VISA distributed the losses to all of its customers, and charges appeared on everyone's statement.) Next, Bitfinex created a variety of new digital tokens exchangeable for cash. The company gave account holders one BFX token for each dollar lost.
Customers had no alternative options besides accepting the token. When customers sold their tokens, the company paid $0.20 each. Bitfinex responded that it was not the company's fault the customers did not wait for the token to grow in value to $1. The current value of BTX Bitfinex is open to paying a small amount of cash to customers less than the value of the Bitcoin but will not return the Bitcoin. Now, it is up to the courts to decide who gets what and how much. Bitfinex is in Hong Kong. What legal leverage does an American investor have to get their property back? Who has jurisdiction? There is no leverage and Hong Kong has jurisdiction. It is highly unlikely American investors will get any their investments returned.
What Does This Have to Do with Gold?
Some people will compare Bitcoin to gold. They say, "Bitcoin is digital gold." Please pardon the horrible pun, but they should call it "Bit-Con," because that is a lie. Comparing Bitcoin or any cryptocurrency to gold is one of the most ridiculous things someone could say about the two different assets. They are not considered the same asset class and have little in common. Bitcoin is a speculative asset, and gold will be considered either a cash equivalent or alternative asset depending on what type of precious metals products you buy. Second, Bitcoin is wholly abstract, and gold is a tangible asset you hold in your hand.
I will start by stating my bias. I am not a fan of cryptocurrencies. To me, cryptocurrencies represent a limited supply of nothing. Also, there is no objective way I know to give a fair value to a cryptocurrency. With stocks, there are different models to estimate future earnings to measure if a stock is undervalued or overvalued. Financial indicators and economic conditions can help determine whether gold is a buy, hold, or sell. Real estate can be valued by comparing it to similar properties and movements within a local economy. Multiple ratios can give complementary data to comparable sales to value real estate.
However, to the best of my knowledge, cryptocurrencies don’t have a method of valuation like other assets. Still, an investment can be valued at the current price and expected future value. If there is no method to predict the value of a cryptocurrency other than hype, then it is not an investment. It is a speculative gamble. Gambling is not my investment style, so I don’t do cryptos. If I ever decide I want to gamble away my money, I will go to Vegas. At least in Vegas, they give you a free meal to comfort you as you lose all your money. I want as little investment risk as possible and diversified across asset classes.
Cryptocurrencies represent a threat to centralized power if transactions can happen outside of the taxing authorities' eyesight. When the Fed releases a CBDC , cryptocurrencies will become illegal. China is closer to releasing a digital currency and has already criminalized cryptocurrencies. India is also closer to releasing a CBDC than the U.S. The central bank of India is calling for the criminalization of cryptocurrencies and pushing the G20 to adopt a similar policy. Sadly, the U.S. has followed China’s lead on several economic and political policies over the last few years. U.S. policy will eventually follow China's cryptocurrency policy as well. The long-term outlook for private cryptocurrencies is dismal. Still, none of these arguments against cryptocurrencies translates into the most compelling argument for precious metals.
Instead, stories like this hack offer a noisy reminder of what a wise investor once said. “If you can’t hold it, you don’t own it.” The Bitcoins were recovered, and the customers still fight to return their wealth six years later. Being separated from their wealth gave the power to someone else, and the other party didn't want to give their wealth back. Having wealth in your control is the best way to avoid these problems. Precious metals offer peace of mind and a sense of control when you store them at home.
Today is the day to take back control of your finances.
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byRyan Watkins, Op-Ed Contributor