By Steven J. Spence
Up is down and left is right!
Investing has been departing from the institutional norms and how any particular investment moves up or down is becoming more predictably unpredictable. Wha? For example, how does Bitcoin, lose almost 50% of its value and then become an interesting investment again? Did the company make changes? Did they change CEOs? How about their cost structure, did they fix that? Of course, Bitcoin just exists and none of these things are possible. Yet, over the past week it has gained around 20%. How does it compare to gold? Over the same period of time, gold has only gained 1%.
I am reminded of the story of Sony Betamax. In the 70’s, Sony launched its Betamax video tape recorder (VCR) and a year later, JVC released a VCR in the VHS format to compete against it. The Betamax provided higher quality and made it to market before the VHS version and, rightfully so, the Betamax should have dominated the market in sales. Which one have you heard of? VHS? Or Beta? Sony would not share the licensing of its superior format and quickly lost to the VHS version. JVC countered Sony with their inferior machine, but by partnering with many companies, they were able to provide the consumer with more movies to view. By the mid-1980s, Sony’s Betamax lost to JVC’s VHS.
What is the point of this story? Quality is not always a guarantee for dominance in a market. What really should be recognized is where the masses go to buy or invest. They will determine what will be the next shooting star (sometimes). Take a look at Hertz Car Rental (HTZ), a company in bankruptcy and through coordination of the masses, they drove the stock up 295% in two days. And let’s do not forget GameStop (GME) that was driven up to 1,653% in less than two weeks! In an experienced investors mind, these are very poor investments, yet some had profited quickly and nicely.
In the case of Gold and Bitcoin, there are several things to take into account, as gold you can touch, where Bitcoin is only digital. Bitcoin can be moved around quickly and is not easily seized. Gold is physical and the more you have, the more it weighs and can be seized by anyone.
The market capitalization for gold is $12.213 T and for Bitcoin it is $829.29 B. Bitcoin has a long way to go to match gold, and Bitcoin has a very short history when compared to gold. What most people pay attention to is the unit price. 1 troy ounce of gold is $1922 while 1 Bitcoin is $43,709. To the masses, the value appears to be in the Bitcoin and regardless of any other factors you may want to evaluate, it is where the masses believe it should be. 1 Bitcoin is worth $41,787 more than 1 troy ounce of gold.
Understanding and knowing where the ‘puck is going’ versus ‘where the puck is’ can make the difference in boom or bust of investing. Some will be happy to boast of their overnight success, and you will not hear of those who had the ‘rug pulled out’ from under their feet and lost it all. Warren Buffet stresses “Invest in what you know”. He calls this the “circle of competence”. Test the hype and choose wisely.
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