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 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 banks can always print more money to to boost the economy and stimulate growth, gold and bitcoin are both finite resources.
Secondly, they’re both speculative investments: the price of each respective asset can go up and down depending on all sorts of factors – unlike investments such as stocks and bonds, whose value is driven by earnings and interest payments. As Federal Reserve Chairman Ben Bernank told Congress back in 2013: “No one really understands gold prices.”
And it’s fascinating to see the relationship between the two, particularly when you think about what appears to be a recent inverse correlation between the price of bitcoin and the price of gold. Since the end of last year, as one goes down, the other has gone up. Omkar Godbole at coindesk.com pointed out that gold was at $1,200 on November 13 2018 and up to $1,300 at the end of December, a pattern that’s since repeated.
While he stresses that correlation doesn’t imply causation, he also calls attention to the fact that “the inverse relationship warrants attention” – so that high gold prices could be considered an advance warning of a bullish reversal in bitcoin.
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 just last month, China’s state-run Xinhua News Agency said that Bitcoin has ‘shown the characteristics of safe-haven assets and attracted many investors’ attention.’
It’s 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 mean a rapid return on your investment – though it can drop just as fast, as traders of it over the past year or so will know only too well.
But Bitcoin has a couple of big 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.”
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 masses 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 a new and improved
Plus, governments could either launch their own cryptocurrencies, or simply ban them altogether. In June, 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.
So despite the glamour of Bitcoin, it’s probably fair to say that so far, gold remains a far safer bet than crypto. No government is going to ban it. (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.
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. So while it’s worth keeping an eye on bitcoin, it’s unlikely to replace the real thing any time soon.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.