Physical gold is the only independent, scarce and enduring financial asset. It’s the only financial asset that is tangible and it’s the only tangible asset that is a financial asset. Gold is an independent liquidity reserve. It is something that can be negotiated in exchange for either currency or goods or barter. The misconception is that it’s something obsolete and irrelevant.
When liquidity dries up, cash flow is not the only measure of intrinsic value. Independent liquidity has the highest value at that point because it enables somebody to meet their obligations where other people cannot meet their obligations and thus survive through the trough of the crisis, enabling individuals to potentially deploy this liquidity and invest it in deeply depreciated assets that are depreciated precisely. After all, other people do not have liquidity and are now forced to sell to raise money.
Development of Bitcoin
Cryptocurrency has reached milestone after milestone in the last year and it looks like it is finally leaving the fringes of the tech-savvy young public to conquer the financial market. Many young investors are starting to consider Bitcoin and other crypto coins as real alternatives to gold, the oldest safe-haven investment in the world. But does it make sense to treat them as an alternative to good old gold?
After so many records and high-profile investments, it looks like cryptocurrency is finally breaking into the mainstream. In October 2020, J.P. Morgan Global Markets Strategy analysts suggested Bitcoin as a gold alternative for millennials. It predicted that prices could double or triple if the trend continued. The J.P Morgan analysts’ prediction was a turning point for the bank. Only two years earlier, the bank’s CEO called Bitcoin a fraud and said that he would fire anyone trading it for being stupid. Fast forward and here we are, hearing from the analysts of the legendary bank that investing in Bitcoin was not that stupid.
Looking at the development of bitcoin since then, JP Morgan’s analyst’s prediction turned out to be conservative. Bitcoin would double in price in two months, triple in January 2021 and by February, after Elon Musk announced that Tesla invested $1.5 Billion in Bitcoin and was planning to accept it as a form of payment, the cryptocurrency just skyrocketed. The good momentum was not only a result of a JPMorgan change of heart or Musk’s endorsement. Crypto is slowly being accepted as a legit investment. Besides Musk, other investors and CEOs are also betting on it.
In 2020, Paul Tudor Jones, a well-known Wall Street hedge fund manager, said in December that bitcoin could become a “global market”. MicroStrategy, an American software company, announced in December 2020 that it had bought 650 million dollars in bitcoin, totaling more than one billion dollars invested in the cryptocurrency. Square, a financial payment company led by former Twitter CEO Jack Dorsey, announced in October that it was putting 50 million dollars of its corporate cash into Bitcoin.
PayPal also followed the trend and announced that it would allow people to buy and hold Bitcoin as well as a few other cryptocurrencies. There are endless examples of high-profile investors and companies pivoting in the Bitcoin direction. To complete the wave of good news, the Office of the Comptroller of the Currency, an American regulator, said in July 2020 that banks would be allowed to hold cryptocurrencies for customers. With so many milestones being achieved, some buyers are now treating the cryptocurrency somewhat like gold.
Comparison to Gold
Instead of trading in and out, investors are leaving their money on the table. Similar to gold, bitcoin became a way of keeping investments out of governments’ influence and the traditional financial market but can we compare bitcoin to gold? To answer this question, we need to understand both the differences and similarities between them.
The main similarity is that both have limited resources. While gold is a mineral that is mined around the world, bitcoins (or any other cryptocurrency) are also produced by a process that is known as “mining” but on the internet. Gold production totaled 3,531 tonnes in 2019, 1% less than the year before. Though there is no way to be sure, some estimates indicate that there is only about 20% of the total amount of gold in the world still to be mined. Meanwhile, as of February, there are 18.6 million bitcoins, with the number changing every ten minutes when new blocks are mined. Each new block adds 6.25 coins into circulation. In total, only 21 million tokens will ever be created. This means that more than 88% of the available Bitcoin in the world has already been mined and we are fast approaching the finish line.
Another similarity resides in the fact that both gold and Bitcoin are assets that have little or no correlation with other stocks or currencies. Monetary policies, central banks or governments cannot directly control their value, even if indirectly their action can have an impact on it. What matters to define prices is supply and demand. On top of that, neither Bitcoin nor Gold, pay interest or dividends.
While they share these common characteristics, one big thing differentiates these investments: gold has an actual, physical value attached to it. Gold is valuable because of its historical, commercial and cultural use as well as its anti-corrosive and conductive properties. Bitcoin? Well, the enthusiasts might think this is not true, but scarcity in itself does not give a thing value. Bitcoin’s value comes mainly from the expectation of the future and the belief that eventually its use will be accepted and widespread, therefore increasing its cost.
The test
The truth is that bitcoin is still a speculative asset in a largely unregulated market and using bitcoin as cash is not yet a natural process. People do not have the confidence to undertake large transactions in bitcoin. Crypto in general is still far too inefficient to be of much use for making payments. For example, Bitcoin is capable of processing fewer than ten transactions per second.
For every crisis or turbulence, investors know that traditional investments like government bonds will not bring the expected results and pivot to gold. They search for a real asset that cannot lose its value due to the relentless supply of money. This is not yet the case with bitcoin. Its price is much more volatile and has recently moved with the stock market, which is different from a supposed haven like gold.
On top of that, the cryptocurrency trade is a market where fraud and theft are rampant. Crimes such as selling drugs online have been facilitated and there have even been cases of terrorists using crypto. People have used tokens to bypass laws and capital controls. Countries like North Korea, Venezuela and Iran have also used the cryptocurrency to evade American sanctions.
The Security Exchange Commission sued blockchain payments company Ripple, accusing them of selling unregistered securities after the company sold the cryptocurrency XRP to investors. Owners of BitMEX, the world’s largest cryptocurrency trading exchange, are facing criminal charges for allegedly using laundered money and allowing other illegal transactions. Janet Yellen, US Secretary of Treasure, said that cryptocurrencies used for illicit purposes are a growing problem in the world.
The Matrix
Some investors still aren’t sure about what to do with the new phenomenon. To invest in bitcoin, one needs to believe in its value of it. To be honest, this is true for other investments as well. But when it comes to stocks and bonds, for example, there are legitimate mathematical models to determine their value. Stocks produce earnings and bonds produce income. This is what determines their value. The same cannot be said about bitcoin.
It’s still an unanswered question of how a modern asset like crypto will fit into legal structures dating back a century and how it can be turned into a real haven. The progress witnessed in recent years makes it easy to believe that these financial structures will eventually adapt to the new model and crypto will be broadly accepted and easy to deal with maybe even becoming a haven investment. However, there is no guarantee that will happen. Until then, comparing crypto and gold still seems like a matter of faith more than anything else.
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