Fundamentals Sidelined? Are Returns really the Way to lookout for Investments?

By Shivank Goswami, Financial Author (Hedging Bullion Trades)

 

When it comes to Safety and Returns, the precious metals have been the priority of most of the market participants for centuries. But with the recent technological advancements in the Digital Asset space, especially since the advent of Cryptocurrencies, a lot of assets including the Bullions have come to the trial! So, are Cryptos really the way of Investments or our Old School Precious Metals still have an edge?

 

Why do people ‘Invest’ in the Bullions?

Now this is a question, the answer to which varies according to the market participant, some invest to create a hedge against economic uncertainties, while some just want a stable return on their investments, and then there are some who just love the precious metals and they just believe in the strong fundamentals of the underlying asset. Now, irrespective of these cases, there is one common factor which plays an important role i.e. ‘Trust’.

‘People Trust in Gold and Silver,’ when a participant buys Bullion they know that the Asset has been in the markets for a substantial amount of period, and has proved its worth time and time again. Be it the Global Financial Crisis of 2008, or the recent Pandemic Fall, the Bullions have either provided a hedge to equity investments by not falling much or by recovering at a faster rate than the other assets.

Shivank Goswami

Trust is one of the key driving forces of Investments in Bullions. But the same cannot be said for Cryptocurrencies, even though they definitely have proved their worth in the past decade as a High Performing Asset in terms of Returns, but do people trust cryptocurrencies? Well, that’s debatable, no doubt they have a great scope, but the major issue with them is that they aren’t regulated by any financial body. Therefore an Old School Investor would be a bit cautious when it comes to placing trust in such digital assets. Very recently the trust regarding cryptocurrencies was questioned when Terra LUNA, the coin which is regarded as one of the “Stable Coins”, eroded most(99.99%) of its value in just a week, and eventually got delisted from most of the exchanges.

 

But, what about the Returns?

Now, this is the key differentiator, the bullions are known to provide stable returns while at the same time, cryptocurrencies are popular for providing high returns because of the higher risk factor. As per the Monthly Average Return Data from, 1970 to 2022 i.e. almost 52 years Gold has given monthly returns ranging between 5-10% for 79 months, and for monthly returns ranging between 10-20% Gold has a month tally of about 25 months, while on the flip side it has given returns ranging between -5 to -10% for 54 months and, between -10 to -20% for 10 months only.

Return Range(Gold) Number of Months
+5 to +10% 79
+10 to +20% 25
-5 to -10% 54
-10 to -20% 10

Unlike Gold, BTC(Bitcoin) over a course of roughly 10 years has given monthly returns ranging between 20%-30% for about 11 months, same number of months for the range of 30%-40%, and for about 5 Months, BTC gave returns in the range of 40%-50%, also adding to this there were times, when this asset gave returns more than 50% in just a month! However, its not all good on the flip side, it gave negative returns ranging between -20% to -30% for about 5 months, and for 7 months it gave returns ranging between -30% to -40%.

Returns Range(BTC) Number of Months
+20 to +30% 11
+30 to +40% 11
+40 to +50% 5
-20 to -30% 5
-30 to 40% 7

Now, this is a bit concerning, the returns which BTC has provided over a course of time is clearly off the charts if you look at it from the investments perspective. Even though it is a newer asset, but it surely has given the results. This make the point clear that, when a market participant invest in cryptocurrencies, they clearly expect high returns from the asset, but are investments only confined to returns?

 

The History and The Future

Throughout our Global History, Gold and Silver have been a primary source of Currency for years, but eventually the Bullions got replaced with a fiat system. But, if a new alternative was created then did the Bullions lost their value? No, they clearly didn’t, in fact the value only has strengthened. Why? Because, the bullions have a great economic utility, they have a decent industrial demand, and since the supply is limited to the amount of the precious metals present on the Earth, the ‘laws of economics’ factor in.

Now, coming to cryptocurrencies, if we break this terminology we get two words Crypto and Currencies. The question which arises is, “What is a Currency?” Now, there are various theoretical definitions of currency.

But there is an implied definition as well, i.e. A currency, is a medium of exchange which offers the lowest opportunity cost. Now, the same cannot be said for cryptocurrencies, no doubt that they can and are being used as a medium of exchange but the opportunity cost is still quite high. The sellers of various retail consumption products will refrain from accepting payments in such form because since, the coins are volatile, they might end up receiving less than the actual worth of the product they sold. So, there are some serious concerns related to cryptocurrencies on being a currency itself. Most of the New Investors and Traders look at Crypocurrencies only as an asset which is volatile, and can help them earn decent money. They clearly don’t attach value to it.

Even after the introduction of the fiat system, Bullions still haven’t lost their value, but Cryptocurrencies, which are expected to be the “The Future of Currency” are still away from the time they finds their true value as an asset and not just a hyped up high return providing speculative bet.

 

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