This Top Investor Says Recent Crypto Rise Is a 'Sucker's Rally.' Is He Right?

Peter Schiff thinks speculation is driving Bitcoin's recent price jump.

After a woeful 2022, Bitcoin (BTC) has rallied a little this year. According to CoinMarketCap data, the granddaddy of crypto started 2023 at around $16,500 before rising to over $23,000. It has now fallen slightly and is nowhere close to its all time high of over $68,000, but it's still an almost 40% increase in five weeks.

Some see the rally as a reason for optimism and hope the crypto winter might finally be thawing. But Peter Schiff, a popular economist and financial commentator, isn't convinced. On Jan. 18, Schiff tweeted: "The #Bitcoin rally is providing cover for the #gold rally to continue unnoticed. As the financial media is distracted by the sucker's rally taking place in fool's gold, its (sic) paying no attention to the real rally going on in actual gold."

Why Schiff thinks this is a sucker's rally

Schiff, who's known for predicting the 2008 economic crash, is also famous for his love of his gold and his criticism of Bitcoin. The founding member of Euro Pacific Asset Management, Schiff's main objection to Bitcoin is that it doesn't have any use. Unlike gold, which he believes is a hedge against inflation and could always be used in jewelry if nothing else, he argues Bitcoin is just a string of numbers. Schiff thinks gold is better than money, particularly as he isn't convinced the Fed will be able to curb inflation.

In a 2021 interview with RealVision, he labeled Bitcoin a "fad" and said, "Bitcoin is not a currency -- it's not used as a medium of exchange really or a unit of account." He continued, "It's just used for speculation, but it's not an investment asset like real estate, doesn't pay rent, it's not a stock, it doesn't pay dividends, it's not a bond, it doesn't pay interest."

He thinks that there are different forces behind the two price rallies. For him, Bitcoin has risen on speculation that various speculative assets that dropped significantly last year will now recover as the Federal Reserve relaxes its tightening measures and eases interest rate hikes. In contrast, he says people are buying gold because it's a hedge against both inflation and a potentially weakening dollar.

Is Peter Schiff right about Bitcoin?

Investment decisions don't have to be either/or questions. Depending on the type of investor you are, it's about building a diversified portfolio of quality assets that you believe will perform well in the long term. As such, if you believe gold and Bitcoin could have value, you might own both of them.

That said, Schiff is almost certainly right to question whether Bitcoin can hold its recent gains. The crypto rally mirrors a rally in equities, which one Bloomberg article says is partly down to "wishful thinking swirling that the inflation beast has been conquered." It is hard to believe that the Fed's economic tightening measures will end until it is confident inflation is under control. Some analysts think our inflation problems are far from over.

In addition, many economists warn that a recession could be in the cards. There's a lot of uncertainty, both about what is going to happen economically and what impact this would have on risky assets like crypto. On top of which, we don't know what impact increased crypto regulation will have, nor whether any other platforms will collapse in the ongoing fallout from FTX. The fact that Bitcoin is still nowhere close to erasing last year's losses is another reason for caution.

Rally aside, Schiff is not alone in arguing that Bitcoin has no intrinsic value. Warren Buffett thinks so, too. But there are plenty of Bitcoin fans who disagree, including Ark Invest's Cathie Wood, who point to its potential as a currency in emerging markets and the role it could play in the international remittance market, among other things.

Bottom line

Deciding whether to buy Bitcoin, gold, or any other investments means looking at the fundamentals and deciding how it might perform in the future and how it might fit into your portfolio. In a way, it doesn't matter whether this rally will be short lived or not. What matters is whether Bitcoin can overcome the hurdles it faces and outperform other investments in the coming decade or more.

Cryptocurrency is a high-risk investment. This does mean there's the potential for big returns, but you could also lose everything. Bitcoin may achieve some of the things its fans believe it can, but there are no guarantees. If you're considering investing, make sure you understand the risks involved, use a reputable crypto exchange, and only spend money you can afford to lose.