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Have been pondering #Bitcoin 
and $GLD lately and wanted to share some thoughts I had on valuation (from the perspective of a currency investor):
and $GLD lately and wanted to share some thoughts I had on valuation (from the perspective of a currency investor):
First, a bit about currency valuation broadly. Every currency has an associated risk-free interest rate that is controlled by the issuing central bank. For the US Dollar (USD) that rate is set by the Fed and is currently 0.09%...
For the Euro (EUR) that rate is set by the ECB and is currently -0.48%. One of the most common systematic strategies employed by macro hedge funds is to exploit these interest rate differentials via borrowing in the lower rate currency and lending in the higher rate currency...
For example, a HF may borrow EUR at -0.48% (getting paid to borrow!), convert the EUR to USD, and then lend the USD at 0.09% netting a spread of 0.56%. The HF will earn this spread so long as the exchange rate does not move too far against the trade in the interim...
Because of the advantage of borrowing in lower interest rate currencies and lending in higher rate currencies, the currencies with high interest rates will tend to appreciate and be “expensive” relative to what one would think from examining “purchasing power parity” (PPP)...
while currencies with low interest rates will tend to depreciate and be “cheap” relative to what one would expect from PPP (google PPP if not familiar)...
How do bitcoin and gold fit into this? Let’s start with gold. While gold does not have an interest rate, it would be reasonable to think that the price of gold over the long-term would keep up with the rate of inflation...
We can therefore think of the rate of inflation as the interest rate earned by gold against the USD. Because of this, investors tend to demand gold when the rate of inflation is expected to be higher than the interest rate on USD, and vice-versa (just like with Euros)...
Here I show a chart of the price of gold and the “real” interest rate for the USD which is just the interest rate minus the expected inflation rate. We can see a clear relationship – the price of gold tends to rise as real rates fall and vice versa...
The recent fall in real interest rates well explains the recent rise in gold. What about bitcoin? I think bitcoin is best viewed as a technological disruptor to gold...
There are many technical advantages to bitcoin relative to gold, but gold has the advantage of thousands of years of use as a currency and more acceptance as to where it should be priced relative to other goods and services in an economy...
In my view, bitcoin will take several decades to unseat gold as the preferred vehicle for hiding out from negative “real” interest rates on USD, as older generations will be slow to entrust significant portions of their wealth to something so new and foreign...
Nevertheless, over the coming decades I would not be surprised to see bitcoin approach the “market cap” of gold. As always, the “real” interest rate policy of the Fed will determine the size of that market cap...
A pivot in Fed policy towards higher real interest rates would be damaging to the max combined market cap of bitcoin and gold. END
