For the last two weeks, cryptos were down and gold was up. This has been the case in just 4 of the 17 weeks since January 1, 2021. It’s really a time to think, is this the endgame for cryptocurrencies? However, Gold peaked on August 6, 2020, and is down 14% percent to US$1784.15 per ounce on April 27, 2021. Over this same time, bitcoin rallied 363%. Bitcoin has greatly benefited from great social media hyping. The biggest hyper is Elon Musk whose Tesla Company sold some of its bitcoin holdings last month but told no one until this week. The hype has been strong. So strong that it has drawn money from metals into crypto.
Bitcoin sales by Tesla grabbed headlines but is not the only crypto warning sign in the past 7 days. The government of Turkey has banned cryptocurrency as a payment of services in the country. To be sure the government of Turkey has badly managed its economy for many years, and the Turkish Lira plumbs new lows. The government is trying to keep the populace locked into Lira that is government controlled. Governments never like to lose the tools of control. To be fair this mismanagement began back before Turkish Lira had competition from anything other than gold and silver, but the game is now changed. We note that Turkey has not banned gold or banned silver. In fact, its own banks hold precious metals so a ban would be destructive for the system.
The Endgame: Cryptocurrencies V/s Government
Two Turkish cryptocurrency companies that together hold more than US$2,000,000,000 of client assets have gone dark with no plans in place to make customers whole. Did those two companies go dark because of government rule changes? Or were they about to go dark anyway? If the endgame means zero for crypto holders either way, the answer does not matter. Unfortunately, this event reproves the most important rule for investors, if you do not hold it … then you do not own it. Physical precious metal is the only solution. Perhaps the crypto zaniness is starting to peak, and we should look forward to our Turkish crypto venture friends rejoining us in the physical metals.
India is also making moves against cryptocurrencies. New legislation will ban all other digital currency in favour of one issued by India’s own government central bank. A period less than six months would be provided for current bitcoin holders to sell, or swap into the new digital government coin.
As you may already know India represents a really large market for physical gold. India’s consumer demand is approximately 20% of the total world consumer demand for example. So, the competition between crypto and gold has large implications for global demand of physical metal.
Lots of governments are working on their own version of a digital currency. China has already shown off its new digital currency to the world. The most important thing to know is governments do not like competition from the private sector when it comes to money. In fact, that lack of competition is exactly why we call paper money Fiat money (government issued). Fiat money bans all competition from private sources.
Apparently certain government investigators wished all embezzlers and money launderers used cryptocurrency because it is so much easier for government to track versus cash transactions or physical metal transactions. Being able to read a permanent record forever afterward of every trade and study repeating markers will turn out to be a huge benefit for law enforcement. Anonymity was a feature of crypto on the way up. It was very much hyped. Maybe the bitcoin top comes as we learn anonymity is false. America’s Internal Revenue Service has applied for and been granted rights forcing certain crypto exchange operators to turn over information on US taxpayers.
The Endgame for Cryptocurrencies begins
Assume for a moment that crypto investors living in China, India, Turkey, the United States, and any other country that egregiously taxes crypto gains or bans crypto outright will eventually take their lumps and lick their wounds. Where do these investors turn next? Will they be happy to own Fiat currency? Will they be excited about investing in other markets like stocks if it turns out the lesson they learned about crypto was that the game is rigged? Is this the endgame for cryptocurrencies? New regulations against cryptocurrencies could prove to be catalysts that return a significant portion of these investors to the physical metals market.
Perhaps the outperformance of crypto over gold for the past 12 months will swing back in the other direction as regulations and increased tax on bitcoin become widespread.