New Gold Dream
Is bitcoin the new gold? At first glance, the comparison seems unlikely: one is a relatively new and volatile, decentralised digital currency that can be exchanged anonymously without the need for an intermediary, while the other is a reliable safe-haven, physical asset that societies throughout the ages have coveted as the ultimate sign of wealth and prosperity.
But upon closer inspection, you’ll find some interesting correlations between the two assets. There’s a reason why journalist Nathaniel Popper named his shortlisted book about the cryptocurrency, ‘Digital Gold: The Untold Story of Bitcoin‘, after all.
Ups and Downs
Firstly, both gold and Bitcoin are alternative currencies. Central banks can’t manipulate the price of either, because they are decentralised, which means that the planning, organisation or policy of an organisation or product is distributed away from a central authoritative location or group. So, while central banks can always print more money in an attempt to boost the economy and stimulate growth, gold and bitcoin are both finite resources.
Some experts believe that gold and bitcoin are both safe-haven assets: places to put your money when the global political and economic outlook is uncertain. But while gold has long been regarded as a safe haven, opinion is divided as to whether Bitcoin has reached that status.
In 2018, Goldman Sachs analyst Zach Pandl wrote: “Digital currencies should be thought of as low/zero return or hedge-like assets, akin to gold or certain other metals.”. And China’s state-run Xinhua News Agency said that Bitcoin has ‘shown the characteristics of safe-haven assets and attracted many investors’ attention.’
But one can’t be half pregnant. It is either a safe-haven or it isn’t. And just a cursory Google search of Bitcoin or Crypto hacks reveals how unsecure and murky this world is. It is worth reading Investopedia’s The Largest Cryptocurrency Hacks So Far. A quick Wikipedia search hardly gives confidence:
One type of theft involves a third party accessing the private key to a victim’s bitcoin address, or of an online wallet. If the private key is stolen, all the bitcoins from the compromised address can be transferred. In that case, the network does not have any provisions to identify the thief, block further transactions of those stolen bitcoins, or return them to the legitimate owner.
The technology may be innovative and the philosophy behind it may contain overlapping facets with gold. But the truth is that the crypto brand is already tarnished with so many hacks, frauds and thefts. And this means that it cannot be considered a safe-haven.
Easier But at What Cost?
At first, it can be easy to see the advantages of bitcoin over gold for the modern investor. Bitcoin is far more portable. You can actually buy things with it. It doesn’t cost anything to store. Governments can’t confiscate it, and you can’t counterfeit it. Because it’s so new, it’s attractive: who doesn’t want to be in at the start of something big? And Bitcoin is far more likely to experience price leaps, which can mean a rapid return on your investment – though it can drop just as fast, as traders of it over the past couple of years or so know only too well!
But Bitcoin has many issues which Gold doesn’t have. As CEO of Wheaton Precious Metals Randy Smallwood pointed out in an interview with Kitco: “All cryptocurrencies are virtual and therefore are replaceable. But there is only one type of Gold.” And technology is moving so quickly in the gold market that many of the apparent advantages of crypto will also be available for gold.
Indeed, looking at the arguments of Bitcoin supporters it quite easy to challenge some of these advantages:
· “You can buy things with Bitcoin” – Bitcoin has failed to take advantage of its early publicity and become ubiquitous. There is very little to buy with Bitcoin these days. And very soon, you will be able to buy things with Gold.
· “It’s portable!” – and so will every asset be as technology improves.
· “It goes up so quickly!” – and it also goes down very quickly. Volatility of this kind does not make a good store of value. It also demonstrates how illiquid Bitcoin is. Something a currency should never be.
Easy Does It
All it takes is for someone to come up with another cryptocurrency with all Bitcoin’s advantages and none of its disadvantages – the main one being that the general population don’t find Bitcoin easy to buy, understand and actually use. Just such a scenario is playing out right now: Facebook recently announced its own cryptocurrency, which while facing challenges form US authorities right now, may still take off – and where would that leave bitcoin? There’s also the matter of emerging competitors: Ethereum, Ripple, Litecoin, Dash, and countless others are all fighting for their share of the market, claiming to be new and improved.
Plus, governments could either launch their own cryptocurrencies, or simply ban them altogether. Recently, China announced that it would block access to all domestic and foreign cryptocurrency exchanges and ICO websites, and there have been rumours that India is considering something similar, as is the European Central Bank.
So, despite the glamour of Bitcoin there is really no comparison to gold. No government is going to ban it, and even if they tried its value would go up. Indeed, recent figures show that many central banks, including China’s, are buying plenty of it themselves. And unlike Bitcoin, gold is a physical asset, with a value beyond the numbers on a graph. It actually exists outside of a server.
And, of course, buying gold has become far easier for the casual investor over the last few years, with sites such as Goldex allowing anyone to buy and sell the yellow metal, and track its up and downs. Thus, while the Bitcoin story is interesting, it will never replace gold.
Key Points of Crypto vs Gold
· Gold is a finite resource, cryptocurrencies can be created very easily
· Gold has been used and recognised as a currency and store of wealth for thousands of years, cryptocurrencies have no such history
· Gold is a real tangible element, a construct of nature. Cryptocurrencies, like most other currencies, are human constructs
· The Blockchain is supposedly unhackable but with the era of quantum computing soon to arrive we will see computing power increase exponentially. It is therefore far from certain that Blockchain technology could be safe in the next decades as its proponents claim
· Gold is accepted as a real, stable financial asset that has use beyond investment purposes. Bitcoin and other cryptocurrencies are yet to break into the mainstream even after a few years of existence and publicity are still viewed with much scepticism
· Bitcoin has suffered many attacks, hacks and thefts despite its proponents claim of being secure