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Crypto/Blockchain Interviews

Adam Perlaky (Yale SOM 20), Gold Portfolio Manager

Adam Perlaky is Manager of Investment Research at the World Gold Council, the market development organization for the gold industry. Most recently, Mr. Perlaky was a Managing Director, Head of ETF Research & CCO for Market Realist, an investment information technology company. Before joining Market Realist, Mr. Perlaky was Chief Strategist at New Albion Partners, a boutique investment brokerage firm. He spent over a decade as a hedge fund portfolio manager and trader with a focus on derivatives and volatility strategies. Mr. Perlaky is currently in his second year of the Yale School of Management’s MBA program.

The views and opinions expressed in this interview are those of Mr. Perlaky and do not necessarily reflect the official policy or position of the World Gold Council.

The Politic: What’s your background? How did you get involved in crypto/blockchain?

Adam Perlaky: I spent 15 years on the buy side as a portfolio manager and trader focused on investing across the capital structure via derivatives. Following that I ran an investment research firm, and for the last two to three years, I’ve been at the World Gold Council focused on investment research in the gold industry.

I research the crypto space because some people have compared it to gold. We’ve looked at the components of the crypto and blockchain spaces and come to the conclusion that, while we see some merit and potential for crypto and blockchain in the future, we do not believe that crypto exhibits the qualities of gold.  We don’t have anything in the space right now, but we are continuing to investigate new ways of investing in gold.

What’s the basic gist of the comparison between crypto and gold?

I’ve thought about how crypto compares or doesn’t compare to gold, and I’ve put out a couple of pieces looking at why cryptocurrencies aren’t gold. We think gold is very different from cryptocurrencies: Gold is less volatile, has a more liquid market, trades in an established regulatory framework, has a well-understood role in an investment portfolio, and has little overlap with cryptocurrencies on many sources of demand and supply. It’s not that there’s no place for crypto or blockchain technology, but that crypto has not exhibited the qualities of gold thus far. It’s about what we’ve seen from the data at this point.

What are the major qualities of gold?

There are a few elements. Gold is an asset class of its own and belongs in all portfolios: It’s a source of long-term returns on par with the stock market, a diversifier that can mitigate losses in times of market stress, a liquid asset with no credit risk that has outperformed fiat currencies, and a means to enhance overall portfolio performance.

In terms of how this compares to crypto: First, there’s the concept of gold as an established monetary asset, whereas we have yet to see cryptocurrencies in actual use as money; in theory you can transact with cryptocurrencies, but there’s little evidence to show that people are using it for that purpose. The transactions are incredibly expensive in the crypto space. Gold has a rich, multi-thousand-year history of use as a monetary asset; Bitcoin, on the other hand, has only been around for 11 years at this point. In that way, gold has proven itself to be a monetary tool for longer, even, than fiat currency.

I would also point out that gold is less volatile than crypto. We’ve seen single-day movements in the price of crypto that surpassed 10 percent. If crypto is to function as a monetary asset, that volatility can pose a serious challenge. Imagine wanting to buy a cup of coffee from Starbucks when that cup of coffee might cost you 10-percent more or 10-percent less of your Bitcoin based on whether or not the price has moved in the last hour. That’s a big concern to think about.

The dynamics of supply and demand are also different. Gold has many different sources of demand; it’s not just a store of value or an investment tool– it also serves a function. Over 50 percent of gold demand comes from the jewelry market. It also serves a function in technology and medicine. Compare that to crypto, which has been more of a speculative investment based on the idea that it could, at some point, serve as a monetary asset or store of value.

A couple of other data points to consider, too. We’ve had a real risk-off environment in the past year. As the market sold off dramatically, gold performed really well while crypto fell off pretty substantially– even in the last quarter of 2018. We’re yet to see that crypto can serve as a safe haven like gold.

How about liquidity? Any way to compare the two?

If you look at the gold market, it trades over $200 billion per day, which puts it on pace with the S&P and other major foreign exchanges and large, broad-based indices. Bitcoin’s volume, however, is less consistent. You’ve seen periods of days with trades in the hundreds of millions, rather than billions or hundreds of billions. Even very small orders can oftentimes move the crypto market quite a bit. In that way, there’s a significant liquidity difference there.

There’s also a liquidity difference in terms of access. There’s a spot market and now a futures market in crypto, but the futures market isn’t very liquid. On the other hand, the gold market provides access through futures, spots, OTC derivatives, and other methods.

If you’re looking for an inflation hedge, why gold as opposed to silver, treasury bills, or the VIX?

I’m actually publishing a paper in the next couple of weeks that looks at gold in the context of commodities. To answer your question, gold has some of the qualities of each of those things, but each of those things don’t have all the qualities of gold.

Let’s start with the VIX. Gold acts as a safe haven. In periods of time where the market has a big selloff, the VIX and gold will both rise. But for some of the reasons why gold is a strategic asset, it still performs in up markets when there aren’t selloffs, unlike the VIX. So, gold is similar to the VIX in selloff periods, but that’s only part of the story.

Now for silver and other precious metals. Gold is a precious metal, and it serves a purpose in jewelry, technology, and medicine. Silver also serves a function in all of those domains. But the demand for gold is much more diversified than for silver. 

Silver also tends to be a little more correlated with the economy than gold. For instance, silver is used in the production of automobiles, and when you’re selling fewer cars, you’re selling less silver. To the contrary, people step in from a jewelry standpoint or a risk-off standpoint to buy gold when the price falls. So while there’s an undeniable correlation between silver and gold, silver’s correlation to the market is much higher in down times than gold (which actually has a negative correlation).

What’s the baseline for understanding/comparing the volatility of a given asset? At what point does a trader say, “This is too volatile to be a hedge,” especially as it pertains to crypto?

Here’s the way that I think about it as an ex-trader. There’s the VIX and the ‘vol of vol,’ or the volatility of the VIX itself. I think the long-term average of the VIX is around 19. A 16 or 17 means something moves about one percent a day, so the implied risk of the market in the VIX is around one percent a day.

Then there’s the vol of vol, the volatility of the VIX itself, which basically says, “How much does that VIX index move against itself on a given day?” That value can be anywhere from 50 to 150, and what that means is that the VIX itself is volatile. The reason why that’s interesting is because that’s roughly the volatility of Bitcoin. In other words, Bitcoin is so volatile that it’s actually moving more than the volatility of the Volatility Index itself.

I’m not saying that it will always be that way, but that’s what the data tells you right now. If you look at a basic economics class, the professor will ask, “What is money?” There are three to four requirements for something to be money, and one of them is whether it functions as a store of value. In my opinion, you can’t use something as a store of value if it’s moving as much as crypto moves in a given day.

Another requirement is whether it functions as a monetary exchange. If you look at the data, Bitcoin’s use as a monetary exchange is very, very minimal. At this point, you can’t really say that Bitcoin is money.

How about in hyper-inflationary countries where crypto is relatively less volatile than fiat currency?

You see gold used in a lot of those countries as well. Unless there’s a restriction against gold, why wouldn’t you just own gold instead of crypto? In fact, that’s one of the reasons why India is one of the larger buyers of gold: there’s a cultural component, in that gold was a stable source of value and money with a Third World currency.

When you look at Venezuela, Zimbabwe, and the other hyper-inflation situations, I still don’t buy the argument that you would use Bitcoin in place of gold. However, I can see why someone would make the argument that it’s equally volatile.

What would a crypto-enthusiast respond to that?

Some of those countries don’t allow you to buy gold, or restrict your ability to buy it, or make it very difficult to buy it.

Why do governments do that? Because it’s a threat to their local currency?

That’s one reason. If you look at U.S. history, the U.S. confiscated silver in the 1900s, moved on/off the gold standard, and cut the value of the dollar against gold. We’ve seen numerous times that central banks and governments have fought against the risk of their fiat currency losing monetary status.

Someone might say that it’s comparatively harder to shut down/regulate digital platforms (e.g., crypto exchanges) than to confiscate physical gold. E.g., every time a torrenting server is shut down, a new one is put up almost instantly. If that’s true, does that support using crypto in place of gold?

I’m not sure that you could ever completely shut down personal holding of gold for the fact that people actually possess it. What if, all of a sudden, the government says, “We don’t like crypto– it’s dangerous and a threat to the US dollar” or something like that. The government could easily go out and say that U.S. businesses are not allowed to accept crypto as a currency. You might ask, “How can they do that?” Well, these organizations operate within the confines of the U.S. government, they have to pay taxes, and they have to accept the currency of the dollar.

The government can also go out and say, “You can accept cryptocurrencies, but you have to disclose those transactions. And when you do, we’re going to charge you a massive tax. We’re going to tax you out of the ability to make crypto viable.” At that point, the merchant is left with following those rules or operating in an illegal environment. 

What do you think of tokenizing gold? Some people say that it’s too hard to move physical gold– is that really a problem?

Gold is easy to move by futures or gold-backed ETFs. When someone buys a gold-backed ETF they’re buying a product that’s 100-percent backed by physical, allocated gold. There’s gold literally tied to your name in a vault. You may not be able to hold that gold, but it’s certainly there, and it’s backed 100 percent. So, there’s a way to get that exposure without lugging around physical gold. 

Doing a digital version would act in a similar way, where you would effectively buy a product backed by physical gold. I think one of the rationales for digital gold is the idea of a general shift to interest in that space– people just becoming more comfortable with that, or wanting to take the middleman out, or wanting to take the banks out of the space. 

It’s just another way to theoretically get your gold. I certainly see why it could be successful, but I think it’s important to understand that digital gold, which is backed by physical gold, remains drastically different from Bitcoin and other cryptocurrencies which are backed by faith in a computer algorithm that will in theory stop issuing these tokens at some point.

I’ve heard of gold credit cards which I think allow you to transact in gold– is that accurate? Do people actually use those?

Gold credit cards are becoming more popular. It’s called “fractionalized gold.” This concept kind of exists in a lot of different ways, even with stocks. The way it works is like a debit card. When you use it for purchases or take money out it basically draws against the amount of gold your account is backed by.

So, there are alternatives out there. I’m not sure how widely it is being used at this point, but the point is that FinTech will continue to evolve, and that’s intriguing. Again, my goal is not to say whether or not Bitcoin or crypto will be successful, or whether blockchain will be successful, but to show that crypto is very different from gold.

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