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Doomsday Scenarios for Bitcoin and Gold…

Bitcoin’s latest volatility drop is causing quite a stir.

The world’s premier cryptocurrency plummeted from its all-time high of $41,436 on Friday to $30,549 on Monday (a 26% decline), prompting U.K. regulators to warn investors that they “should be prepared to lose all their money.”

“There is no guarantee that cryptoassets can be converted back into cash,” regulators said, adding that “converting a cryptoasset back to cash depends on demand and supply existing in the market.”

Scary words, right?

Let’s provide a bit of context.

Bitcoin hasn’t been tested during a massive crisis event, which means it’s virtually impossible to accurately predict exactly what would happen to its price under extreme duress.

In order for predictive algorithms to function well, financial assets would typically have 50–100 years of data —spread across countless economic cycles — to underpin the projections.

Bitcoin, however, has a very limited history.

Therefore, until proven otherwise, financial models must account for the possibility that Bitcoin blasts higher in a doomsday scenario, like what nearly happened in 2008 when the U.S. banking system stood on the brink of failure.

The opposite scenario — a total collapse of Bitcoin — must be considered, as well.

The biggest risk to Bitcoin is known as “protocol risk” — or, basically, any and all risks to the integrity of Bitcoin’s digital infrastructure.

“Bitcoin has inherent value only because it has the unique characteristics of ‘sound money’ (scarce, durable, accessible, divisible, verifiable and censorship resistant). If any of those qualities are compromised, the foundation to its investment case will be eroded or gone. Such protocol risks were high in its first few years, but after two major controversial hard forks and three successful halvings, it seems that protocol-level risks are somewhat contained,” writes Hong Fang, CEO of OKCoin.

Nonetheless, if Bitcoin’s liquidity dried up during a crisis, it’d be difficult to cash out.

Yet gold isn’t necessarily immune, either.

Born out of convenience, in the modern age of investing, people tend to rely on ETFs and certificates as “paper proxies” for owning physical bullion.

Such proxies may work as planned during normal market conditions, but in the face of crisis — when investors need a safe haven the most — ETFs and certificates could fail.

See, since ETFs typically lease their gold from central banks, their shareholders don’t truly own any bullion. Therefore, if a gold ETF were to default, bankers would demand the return of all bullion. In this scenario, similar to a bankruptcy filing, ETF shareholders would have to rely on the courts to get their money back.

Point being, unless you own the rights to bullion locked in a vault — a defensive measure that requires paying storage costs — the U.K.’s Bitcoin warning can also be applied to most precious metals ETFs.

In the truest doomsday scenario, we’d likely revert to a barter system… and having access to bullion would sure come in handy.

Onward and upward,

Robert Williams

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Robert Williams

After nearly 20 years in the trenches of high finance, Robert has joined St. Paul Research to assume the role of Chief Futurist. Robert cut his teeth as an analyst for one of the most revered and prestigious medical institutions on Earth, whose endowment is valued at $4.3 billion. From there, Robert became the lead...

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