Why I’m Selling Gold for Crypto

And Buying ETH

Onymous Dev
9 min readOct 31, 2021
The Gold Standard, no more? (by Jingming Pan)

TL;DR

Gold is not a historically reliable inflation hedge. May as well invest in something practical.

Introduction

I recently dropped my position in GLD, “the largest physically backed gold exchange traded fund (ETF) in the world”. I intend to buy Ethereum-based cryptocurrency assets (ETH and select ERC-20 tokens) to fill its position in my investment portfolio. To explain this irrational behavior, I’m going to detail my thought process in the following steps:

  1. Why I invested in gold in the first place
  2. Why I believe gold is a poor investment
  3. Why I am investing in cryptocurrency
  4. Why I am buying ETH (and not BTC, and definitely not DOGE/SHIB)
Screenshot of Robinhood portfolio position in GLD
GLD represents a whopping 35.38% of my portfolio diversity. 🤦‍♂

Why I invested in gold

To explain my foolish gamble in gold, I must first describe myself as an investor. Based on the screenshot above, you can already deduce a couple of things:

  1. I have a Robinhood account.
    Translation: I’m a casual investor. I started investing shortly after starting my first full time job as a software engineer. Basically all of my friends had already started investing and preaching the conventional knowledge that money in the bank is money losing value to inflation, so I entered the stock market in the easiest way I knew how to — by downloading Robinhood.
  2. I have about $26.5K invested in this account.
    When I opened that account on Robinhood, I had some assets saved up from a couple of internships (the paid ones) and I’ve deposited a portion of my take-home income to the account. It’s not a huge sum of money, but I’m hoping it will grow with time and some TLC. I later read about how Robinhood makes money and decided it conflicted with my best interests. I’ve since curbed my monthly contribution and invested some assets elsewhere, including in real estate. It doesn’t cost me anything more to hold these assets in Robinhood, so I’ve left the account mostly untouched for the past few months.
  3. 35.38% of my account balance was previously invested in GLD.
    This is actually my largest single position. How did this happen? Hear me out.

The start of my software engineering and investment careers coincided with another notable life event — the start of a global pandemic. As the economy suffered and jobs and consumer spending tanked due to shutdowns and ill health, governments around the world adopted expansionary monetary policies (think stimulus checks, record low interest rates, and the money printer going brrr).

Never gets old. (source)

Armed with my AP Macroeconomics certification, I immediately realized that hyperinflation was coming and we would soon be burning paper money for warmth. I thought to gold as an inflation hedge, meaning I thought it would hold its value as the value of USD dropped precipitously. After the pandemic was over, my quick thinking would have saved my hard-earned assets and I could build up a more standard stock and bond portfolio.

A year later, things haven’t quite turned out as I’d hoped…

Why gold is a bad investment

As it turns out, a conventional stock and bond portfolio would have served me much better during this year and some change. The S&P 500 reached record highs during the pandemic, achieving almost 40% returns over the past year. Inflation did occur; the Consumer Price Index (CPI) increased 5.4% this year, though partially or predominantly due to global supply shortages. However, the upstart Bitcoin (BTC) emerged as an inflation hedge, 5x’ing from its previous record high. My GLD, on the other hand, achieved a measly -6% return. As a result of this and some other not-so-good investments, I made -3% in investment return during this generally-fortuitous year for U.S. stock market investors. Better luck next time, I guess.

A key miscalculation on my part is that history does not support gold as an inflation hedge during inflationary periods. A likely cause of gold skyrocketing in the early days of the pandemic is that other foolish investors like me considered the asset “Kryptonite for inflation” and bought into the hype. Gold is still a relatively stable asset and has been used as money for thousands of years. However, its value comes primarily from people like my girlfriend, who believe in its sacrosanct value because “it’s so shiny.”

A pair of gold rings
Somehow, less gold is worth more. Probably because it’s an equip. (by Allec Gomes)

Why crypto makes sense

I wasn’t sold on crypto this time last year. Otherwise, I might’ve done much better in my investments and have written a similar article in a much snarkier tone. After the market cap of popular cryptocurrencies doubled, doubled, and doubled again, I finally gained respect for the form of currency. The same cannot be said for coin-trading profiteers — most are some combination of lucky and nefarious. The biggest reason I’ve come around on cryptocurrency as an investment is that we’re starting to see practical usage of blockchain, the technology upon which these cryptocurrencies were fabricated. I’m talking about Decentralized Finance or DeFi.

From a Twitter bird’s-eye view, DeFi is a revolutionary movement to build financial incentives guided by self-enforcing contractual obligations. DeFi is built upon the core principle of trustlessness that motivates the entire blockchain concept. As an example, imagine if you pulled up to the neighborhood 7-Eleven and handed the cashier two one-dollar bills and asked for a lotto ticket. Instead of annoyedly grunting and handing you a lottery ticket, the cashier pulls out a gun and shouts at you to leave. You escape the scene… and now what? You call the police? What are they going to do about your two dollars? They might arrest the cashier for criminal endangerment, but the culprit won’t be charged for stealing your two bucks.

Trustlessness in the blockchain industry simply means you do not need to place your sole trust in any one stranger, institution, or other third party in order for a network or payment system to function.
Gemini

The reason you expect two dollars to buy a lotto ticket in that 7-Eleven is due to a social contract. You just don’t do things like that… But there is no guarantee that you will receive the item that you paid for. DeFi hopes to solve that problem by establishing a digital contract that motivates fair play. In our DeFi world, you might buy a digital lotto ticket from 7-ETHeaven (not a real company, yet) by sending 0.000462 ETH (presently about $2) to a specified contract. The company will confirm the funds have reached the contract but will be unable to retrieve the funds without your approval. Likewise, you cannot retrieve the funds from the contract without the company’s approval. The company now is incentivized to provide you with the item you purchased. After you’ve received the lotto ticket, you can approve the company’s withdrawal of your money. Even if you don’t you have no way of withdrawing the funds yourself — they’ll just be locked in the contract indefinitely.

In this farcical example, we ignore many of the rules of the Ethereum blockchain. For starters, this transaction would probably cost you upwards of $10 to execute, making the whole situation highly impractical. However, we have illustrated a core utility of this economic model — trustless transactions. The contracts enforcing these transactions can vary in complexity, from running a crypto exchange to facilitating a legal marriage, and everything in between. Importantly, these contracts are published and verifiable by other developers, creating a level of transparency that is unmatched by businesses today. This standard of trustlessness is what decentralization is all about. No single institution has the power to change the laws of how money is handled. Contracts on the blockchain are readable and uneditable, and completely govern the rules of how assets received by the contract are handled.

Note: Keep in mind that this does not guarantee safety when working with a DeFi application (DApp). The website or application can be changed freely as it is not published on the blockchain, meaning they can route your funds to a different contract or individual if provided with your account credentials. Only funds received by the contract are governed entirely by the contract’s code. Be especially wary of websites and applications requesting access to your cryptocurrency account credentials, as they will have full control over all functionality of your account, including any monetary value stored in the account.

Why ETH is the new gold standard

Those contracts I just described are a feature of the Ethereum (ETH) blockchain. ETH is commonly known for being the second-largest cryptocurrency by market volume, outsized only by the primordial BTC. However, ETH is vastly more useful than BTC. While BTC can only be used as a store of value, ETH can be the underpinning of a global decentralized economy.

Of note, ETH is not the only currency supported by the Ethereum blockchain. While most of the development in the DeFi space is done on the Ethereum blockchain, it’s far from the de facto coinage. There are “more than 200,000” types of currency that facilitate its financial ecosystem. These “coins” are created via contracts that dictate, among other rules: how many coins should exist, if and how new coins can be created, and how coins can be exchanged. This standard set of rules is called the ERC-20 token standard.

For an investor, it is crucial to understand a token’s origin and characteristics before investment. Just because SHIB is an ERC-20 token does not give it intrinsic value or purpose, except that it has rules that allow it to be exchanged. SHIB was initially created on the Ethereum blockchain consisting of a quadrillion tokens. As a total, those tokens are supposedly worth $66 billion today, though you would not be able to sell too many without tanking its value to near-zero.

Meme-coins aside, some tokens possess certain utility. Some tokens are specially designed to operate certain contracts, others are designed to mirror the value of another store of value. Only time will tell how widely-adopted these tokens are or what they will be used for. As a practical investor in cryptocurrency, I mostly care about two things: the background of the token, and what problem the token is trying to solve. BTC was meant to solve the problem of centralization in currency. ETH was meant to solve the problem of setting and enforcing rules in the marketplace.

As an investment, ETH has the added bonus that all ERC-20 tokens rely on ETH to power their transactions. That is, it costs a small amount of ETH to add any transaction to the Ethereum blockchain (this is the $10 fee I mentioned in our crypto 7-Eleven example) regardless of whether your transaction is done with ETH as your token of exchange. This cost to transact is called gas. It’s a complex topic and you can learn more about it here.

One last note: there are other blockchains — Bitcoin’s, for one — and the most widely used blockchain may be still out there, waiting to be discovered by the masses.

Conclusion

I think ETH is the new gold standard for cryptocurrencies.

I’m betting that the Ethereum blockchain is going to drive incredible innovation as platform and transactional standard. I might be crazy, but buy some legitimate crypto just in case it goes crazy (it hasn’t yet?). Use Robinhood if you have to. Better yet, use a non-custodial crypto wallet if you care about the principle of trustlessness. For those witty and paranoid enough to want to build your own wallet, you’re the best of us. Go study blockchain technology and build the future of economic exchange.

“Why fit in when you were born to stand out?” — Dr. Seuss

pins grouped (left) single pin (right)
They are among us. (by Markus Spiske)

Disclaimer: I’m dumb and I’m a gambler. Please do not take any of the above as investment advice. This is just one YOLO-er’s best effort to make a return based on his limited knowledge of the market. To be fair, if you are taking investment advice from an investor making -3% in historical returns, you’re probably screwed anyway.

Thank you so much for reading! I hope you’ve left this article more informed, more curious, and without forgetting to clap. If I’ve left you hopelessly confused, ask a question in the comments section and I (or maybe someone more knowledgeable) will give you a response.

Golden Ethereum coin
ETH > Gold (by Executium)

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