McIntire Professor Robert Parham has a real problem with gold. His reasoning for the stark negativity is fair.
“Gold is horrible. Every ounce of gold that you can find anywhere is soaked with the blood of innocents. There is no gold on Earth that hasn’t seen wars and crimes,” he says. “Yet this is our standard store of value.”
He concedes that among all of the elements to be found on the planet, gold has been prized for both its scarcity and durability—factors that have influenced people across the globe to seek it and highly regard its worth for centuries.
And though new elements haven’t appeared to take gold’s place as the standard, the world now has the potential to change course.
Citing gold’s scarcity and durability, Parham notes that the same can be said of Bitcoin. “It’s scarce, because there will only be 21 million mined; the algorithm guarantees that. It’s durable because it lives on the internet. The internet was built to survive a nuclear war. It’s hard for me to see a scenario in the future in which the internet goes away.”
He envisions a possible scenario in 10 or 20 years’ time where the total market value of Bitcoin may surpass that of gold, eclipsing the latter’s long-held reign as the world’s measure of worth, causing the price of the rare transition metal to plummet.
Making no outright predictions, Parham says that Bitcoin has already found a use case as a store of value. And that alone may be enough to ensure its staying power.
As Bitcoin continues to climb and drop in value, making as many headlines in investing circles as it seems to be in energy, art, and everything in between, we spoke to Parham to get his insights about crypto assets, digital currencies, and the attempt to control their use.
Should anyone be purchasing crypto assets as an investment, given how volatile they are?
One of the concepts of finance is the risk-reward trade-off. Yes, cryptocurrencies are super-volatile, more volatile than stocks, and definitely more volatile than bonds or real estate—but they’re higher risk, higher reward.
Finance is logarithmic; it’s not linear. Look at the S&P 500 over the last five years. The way to think about it is that Bitcoin over a year looks exactly like the S&P 500 over five years, in terms of volatility, return—everything. It’s just that time is compressed. Bitcoin has a 10% increase over a week, while the S&P 500 might show the same results over a month or two. It’s sort of normal for the S&P 500, and no one thinks about it. Bitcoin and crypto in general being more volatile than the S&P 500? More than anything else, it depends on your unit of time.
That’s it. The daily volatility of Bitcoin is indeed much higher than the daily volatility of the S&P 500, and no one’s going to argue that.
Do you think that the idea of purchasing Bitcoin alone makes sense? Isn’t buying a single specific crypto coin like purchasing a single stock?
Yes, definitely. A single coin is like a single stock, and as we don’t recommend buying a single stock, we generally don’t recommend buying a single coin.
But the situation in the crypto market is somewhat different than the situation in the stock market, because in the stock market, even the largest stock, Apple, is a small fraction of the entire stock market. But in the crypto market, Bitcoin is around 70% of the crypto market, by value.
In general, what we’re saying is that you should buy stocks in relation to their weight in the market. If Apple is 1% of the entire market, then 1% of your portfolio should be Apple. If we take that logic and apply that to cryptocurrencies, then of every $10 you invest in cryptocurrencies, $7 should go to Bitcoin, probably another $2 to Ethereum, and the remaining dollar should be spread across thousands of other coins.
In that sense, exposure to crypto is exposure to Bitcoin; it’s pretty much the same. Now, should people buy Bitcoin? I don’t know. Does Bitcoin have some form of use? I strongly believe so, specifically because of my hatred for gold.
How robust is the crypto ecosystem? Is it possible that all of this just goes away?
I doubt it. The ecosystem is sufficiently distributed and sufficiently diverse. There are many secondary and tertiary backup systems, if you want to think about them that way. The worst that can happen is that a bunch of people will lose money, but it’s not a systematic risk, and people losing money means that markets are operating properly. I like telling my students that bankruptcies are wonderful—I like it when investors lose money. If investors always earned money, then they’re really not taking any risk. And then why are we talking about the risk-reward trade-off? There is no risk-reward trade-off because there is no risk.
Is there risk in the crypto market? Of course. There’s a ton of risk; we just discussed the very high volatility. There are also systematic risks—plenty of them—mostly in the form of political risk. Pretty much all governments hate cryptocurrencies.
That’s a great segue for this next question: Citing protection risks, money laundering, and terrorism issues, the governments of China, Egypt, and other countries have restricted or banned cryptocurrency outright—and others are attempting to join them. What are these governments able to truly achieve with a national ban? Are these threats, or are these restrictions real?
It’s real, but we need to separate it into two separate areas. In one of them, governments can’t really do anything, but in the second, they definitely can.
Let’s start with the second: crypto mining. Just like governments can control large farms where marijuana is grown, governments have the ability to identify places that consume a great deal of energy. Police departments have satellite images of places emitting heat, decide to raid it, and capture a bunch of people growing marijuana because they’re breaking the law.
They can do the same with mining Bitcoin. They could outlaw mining Bitcoin and enforce it because it’s a centralized operation. But outlawing a person at home using a single computer to mine Bitcoin? They can’t effectively do that, just as they really couldn’t crack down on someone growing one marijuana plant.
Now in the first area, transactions, there is literally no way to stop people from transacting using crypto. However, the key place where governments can put roadblocks is moving from the crypto ecosystem to the standard ecosystem, depositing money into an actual bank account.
But, if I traveled to China, walked into a restaurant, and told the owner that I’ll transfer Bitcoin into his wallet that the government knows nothing about, there is no way of stopping it, no way of tracking who paid whom and for how much, because you can create anonymous Bitcoin wallets.
What the government can do is stop major mining operations and stop the interfaces between the crypto ecosystem and the standard ecosystem. What government can’t do is stop people from transacting over Bitcoin or any other crypto, for that matter.
How might regulation in the U.S. shape future adoption and application of crypto assets here? Do you have any thoughts about what current political efforts could mean?
The SEC treats all of crypto as just a wad of cash—like you have a suitcase full of dollars. It seems to be the case right now that regulation for a suitcase full of dollars is about the same as the regulation for crypto wallets. What will the U.S. do about regulating crypto? I have no idea. I try to stay far away from this subject as much as possible because it’s a minefield and because, theoretically, there isn’t a good answer. What governments want and what Bitcoin allows are very separate.
Governments, by their nature, would like to have control of the currency. To quote Frank Herbert’s Dune, “Control the coinage and the courts. Let the rabble have the rest.” The government wants to be in control of economic activity, because that’s what they’re taxing. And if they’re not in control of economic activity, they can claim that this is a case of money laundering or funding terrorism. If you have a way of transferring money from person to person that is completely untraceable, then they can’t access it.
So, they’d be in a position of losing out on tax money until the crypto is exchanged to reach the traditional ecosystem of banking?
Assuming it ever does. That’s the thing: What happens when someone completely moves into crypto? I remember in the early days of the internet, around 1996, before Amazon, Netflix, and delivery services, there was a guy who decided to live at home for a year with only an internet connection. He decided that he can do everything on the internet: work, order groceries, be entertained…but back then, it was just a weird experiment with one weird guy. Fifteen years later, we all do that.
Are there—today—people who have given up all of their actual legitimate bank accounts and who only live within the crypto ecosystem? I assume the answer is yes. It doesn’t make sense to me, given the hype and given the maturity of the field, that the answer would be no. Someone is living off of crypto.
And if someone can do that, right now, then everyone can do that. And if everyone lives off of crypto and the government has no idea who’s doing what, then the entire concept of taxing collapses. Now I hate taxes as much as the next person, but it’s important to remember that we are a society. We need governments; they give us social structure, and one risk with crypto is that we’re breaking our social cohesion by effectively taking away the government’s power to tax.