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[Global] Bitcoin? Stocks? Gold? What should you invest in 2021? The answer will surprise you!

Updated: Mar 7, 2021


20 years ago, the price of 1 Oz of gold was about USD$38 (Source: Gold Hub).


5 years ago, the price of one Bitcoin (BTC) is around USD$400 (Source: Coindesk).


1 Year ago, the price of one GameStop (GME) share on NYSE was around USD$3.40 (Source: Yahoo Finance).


We are almost into the 3rd month of 2021 and the highest recorded price of 1 Oz of gold, 1 BTC and 1 share of GME is ~USD$1,943, ~USD$58,332 and ~USD$483 respectively. Each grew ~5113%, ~14583% and ~14206%.

* Price is for 1 Oz of Gold 20 years ago, 1 BTC 5 years ago and 1 GME Share 1 year ago

** Price is for highest recorded price in 2021 for Gold (1Oz), BTC (1 coin) and GME (1 share)


If You Invested USD$10,000 Back Then:

In investing, there is always the what-if. What if you invested USD$10,000 back then and sold them this year during their 2021 highest recorded price, i.e. gold 20 years ago, BTC 5 years ago and GME 1 year ago? With gold, you would have half a million and close to one and a half million with BTC and GME. That is pretty amazing since it is almost impossible for any investment companies to get a consistent 10% every year (note: if an investment yields 10% return yearly, the outcome after 20 years would be ~600% of the original invested amount). Even the worst performing investment of the 3, i.e. Gold, outperforms the almost impossible good performance of 600% over the 20-year horizon by more than 8 times.


Demand vs Supply


So why does the above 3 "anomalies" in investment occur? Two words: "demand" and "supply". While I may be oversimplifying things here, these two are almost always responsible for the price of things in the world throughout the history of mankind. Price hikes are usually a result of increased demands or decreased supplies or a combination of both. This is a fundamental economic principle and its effects could be illustrated with the demand-supply graphs as shown here.


Genuine Demand/Supply


If demands and/or supplies are genuine, then the price would be sustainable. Can there ever be instances where demands and/or supplies are not genuine? Though genuine may not be the best word here, it should be one of the most appropriate. Ever heard about "Tulipmania"? Many believed that this is the first ever recorded economic bubble in human history. For those who have not heard about this, you may follow the link to find out more. In summary, while there wasn't a genuine demand for tulips, human greed played a big part in driving its abnormal 1200% price increase within a short span of close to 4 months from Nov of 1636 to Feb of 1637. At its peak, there were people paying the equivalent of the annual salary of one skilled craftsmen for one tulip bud. This mania came quickly and ended even quicker; price went back to its original price in the beginning to May 1637. In the case of "Tulipmania", the price increase was driven by speculative demands and the price tumbled quicker than its rise.


Artificial levels of supplies could also impact prices. It has been quite a well-known fact that oil producers control prices by controlling their supplies. There are many articles out there in the internet which could prove the claim. For those interested, follow the link to one of the more recent reports documenting this.


Genuine Demand/Supply for Gold, BTC and GME?


For those of you who are well-read, you would have already known this. For the benefit of those who have not been following, we shall quickly summarise here.


GOLD

For the case of Gold, it is very much expected. Gold has historically been the "comfort" or "safe haven" investment in times of crisis, so the increase in demand, hence an increase in price, was driven by the economic crisis cause by Covid-19 global pandemic (for more information regarding this, refer to the article on NPR's website). With the global pandemic starting to move towards an end, we would expect the price of Gold to decline. Though a decline is inevitable, we would not expect a sharp decline, like that seen in "Tulipmania". This is simply because other than the speculative demands caused by the pandemic, there is a real demand for Gold. For example, all smart devices require Gold to produce and you would be quite surprised by how much is contained in them as compared to gold-rich ore deposits. Also, Gold is being used as being used an asset by many nations in their national reserves.


BTC

How about BTC? While most of you have heard about BTC or cryptocurrency, you might not know exactly what it is. You can think of BTC as encrypted public records. As explained by Investopedia:

"Bitcoin is a type of cryptocurrency. There are no physical bitcoins, only balances kept on a public ledger that everyone has transparent access to. All bitcoin transactions are verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity."


Even though it is a currency, the key difference is that it is not issued to backed by any banks or governments. Which means that when a need for restitution arises, it would be so much harder. Also, unlike bank transactions, it is impossible to reverse a transaction once done. Since BTCs are not backed by any banks or governments nor are individual BTCs valued like a commodity, why are they still so valuable? One of BTC's key "attraction" is its increased privacy as compared to traditional currency or transactional methods. Though a myth that BTC transactions are totally anonymous, it requires significant efforts to track down the identities of the owners of BTCs.


Another big attraction of BTC is that it is decentralised and not controlled by any governing bodies, meaning that it's value is purely determined by the "demand and supply". The supply of BTC currently stands at ~18.6 million (Source: blockchain.com) and will only have room for ~2.4million more before the magical number of 21 million is reached. With supply having a hard-capped limit, there wouldn't be interventions like Quantitive Easing, which usually would cause inflation and/or devaluation of the affected currency. Do note that there are many arguments out there to suggest the opposite, i.e. deflation, would happen should BTC become the mainstream currency. To put it simply, since the supply of BTC is limited to 21 million, the more BTCs you hold, the wealthier you become (while it is the same for all other currencies, their actual purchasing power would decrease over time due to the increase in their supplies). It is already happening now to BTCs; I am sure you have heard about the famous story that back in 2010, someone offered 10,000 BTC in exchange for 2 pizzas. With the same amount of BTCs, one could get 4 top end private jets and still have millions USD$ left.


Now that we have touched on the supply of BTCs, what about the demands for them? From the price chart, it is clear that demands had been on the rise. The question you should ask yourself is, are these demands genuine and sustainable?


In order for us to understand this, let us look the historical price chart of another famous company - Enron. You would observe that prior to its crash in 2001, its price experienced a short period of stellar growth. Demands for Enron's shares were high, however, it was mainly due to the misrepresented books, where their executives "creatively" used mark-to-maket accounting to create a false impression that the company was highly profitable and had huge growth potential. Such stellar performance in share price, while not common, does not necessarily signify red flags for an investment, as long as the price is justifiable with the company's or investments' earning power and potential. Else, such demands would just be of speculative nature and unsustainable, resulting in an inevitable meltdown in its price, as with the case of "Tulipmania".


With all these, what can we conclude about BTCs? We shall leave you to decide. But to add, the biggest reason why the financial industry is so highly regulated, is because of all the scandals that had happened. Each regulation was created to plug the hole in the financial system which had been exploited to create turmoil in the system. As BTC is relatively new and relatively unregulated, we still would not know how it would behave. There were even discussions about whether it could ever go negative. All we could say is, no one expected crude oil price to have a negative value until April 2020. While mathematically, it looks impossible, hypothetically, we could think of one possible scenario that this could happen. Let's assume that in the future, BTC becomes main stream and is the global currency which most people use due to its borderless nature. However, one fine day, all the governments around the world decide to come together and mandate that identities of holders of BTC to be shared in a common database accessible by all the governing bodies around the world by a certain date. This would trigger a sell-off frenzy, especially those who used BTC for unlawful purposes. This would send the price of BTC towards a downward spiral and might reach a negative region. And if BTC is mainstream, distributors/brokers of BTC have legal rights over owners of BTC, so we might reach a situation similar to that of a margin call.


GME (or any other suddenly hyped stocks or investments)


Now, let us move to the latest, most-hyped stock, GME. For those who missed the entire GME saga, go to the report by USA Today News to find out more. In summary, prior to this sudden price hike, GameStop was in dire state and announced that it was going to close 450-500 stores. However, due to the power of internet, demands for the stock were skyrocketed. So, were these demands genuine and sustainable? As you can see, its price fell more than 30% in a day after it peaked at USD$350. As of the time of writing, its price have been fluctuation in the region of USD$100. Imagine buying the stock at its peak with money you would need to use to pay off a debt in a month's time, thinking that you were in for some quick bucks. You would have lost two-thirds of your money by the time you need to cash out to repay your debt!


Without a doubt, GME will continue to be a hyped stock in the following few months but fluctuations would be hard to predict.


What should we invest in then?

Before we discuss this, let us look at the world population projection. From the findings by Pew Research Center, world population would continue to grow for another 80 years, before it starts to plateau. This means that demand for anything that fulfils the basic needs of human beings, be it food, water or shelter, would be on the increasing trend. Looking at this trend, one would immediately think about investing in commodities but for those seasoned investors, they would know that commodities prices are unpredictable and literally subject to God's mercy (for food/crops related commodities).


If "commodities" is out of the question, then what else can one invest in to ride on this trend? Yes, you are right, the answer is real estate, and to be more exact, residential properties. Why is this so? Firstly, prices of houses are almost always increasing, especially in more established economies (see global house price index chart below by the Economist.com).


Secondly, due to the nature of mortgage loans, where the subject for which the loan is taken for is the collateral of the loan, and that the "loan horizon" is usually 10-30 years, one could leverage to a level which is many times his/her monthly income. And let's not forget, mortgage loans are easily the cheapest loans you could get.


With the change in perspectives due to the raging Covid-19 Pandemic, more and more people are working from home and interests in properties, especially in Asia Pacific, are on the rise, with records being set (as shared in our previous articles; follow the links: here, here and here to read more). Covid-19 has also brought turmoil to the entire financial industry and bringing mortgage interest rates to record lows. Moreover, owners of houses could earn rental incomes to help finance their monthly mortgage payments.


If you looking for investment opportunities and your financial situation allows you to take a mortgage loan, we strongly recommend you to consider investing in residential real estates. Especially when you are looking for investments with a fairly long time horizon.


In Summary

If you are looking to invest (and not gamble), you should always look for those that have genuine demands and/or those with the potential to generate more income by itself (e.g. a company with products that have growing demands around the world). Even though real estate investment may not give you the immediate gratification like BTC and GME, it is definitely a much better option after factoring the risks, the (genuine) demands and the factors in favour of real estate investments as shared above.

Agree or beg to differ? Feel free to give your opinions in the comment section.

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