Anyone who has studied or follows economics has heard of John Maynard Keynes. There is a lot that he has said about gold and most of it is not good. He famously called it a “barbarous relic.” But for a while, this relic was the standard go-to assets to hedge against economic uncertainty. Regardless of what key investors and fund managers said about the uselessness of gold, the reality is that gold has always held value better than fiat currency.
For a long while, gold had no competition however, it was clear that with the move towards a digital world something would have to give, and did, with the introduction of Bitcoin. Will the yellow metal survive the digital era of cryptocurrencies?
Bitcoin as Digital Gold
Bitcoin and gold are similar because they are rare assets. Their supply is also limited. Both assets are ‘mined’ in different ways. Gild is obtained by physically mining the ground whilst Bitcoin is mined digitally. Botha gold and Bitcoin are not issued by the government of banks but they can be used as alternatives to fiat currencies.
How is gold different from Bitcoin?
Cryptocurrency gurus predict that cryptocurrencies such as Bitcoin will be like gold for new millennials. Already built on the premise of providing a safe haven for wealth that cannot be touched by government or banks, Bitcoin is fulfilling the role that gold has fulfilled for eons. It brings that independence from fiat currencies, stock markets and how people generally view money. The magnificent rise of Bitcoin at the end of 2017 prompted economists to say that Bitcoin will eventually replace gold. Some have gone as far as saying investors are better off investing in cryptocurrencies than in gold. There are some glaring differences between the two and in their latest investment update The World Gold Council argue about how Bitcoin and currencies like it cannot substitute gold. The reasons outlined are:
• Gold is less volatile than Bitcoin which has been erratic.
• Gold is more liquid than Bitcoin. It is easier to turn gold into cash than to turn it into Bitcoin.
• Gold is better understood than Bitcoin.
• Cryptocurrencies store traded within an established regulatory framework.
• The demand and supply of gold has little to no overlap with Bitcoin.
• For most gold bugs gold is more tangible and it delivers on demand, Bitcoin on the other hand is virtual. It has no use in the real world.
Bitcoin’s biggest problem is its volatility. The most important function of money is to be a store of value Bitcoin is rather unpredictable as it moves 5% up or down per day. Cryptocurrencies are generally held as a speculative investment rather than a medium of exchange. Gold may not be money but it is a store of value used mostly to hedge against rising inflation.
Bitcoin trades an average $2 billion per day whilst gold trades more than $260 billion a day. The liquidity of Bitcoin makes it more volatile than gold. Bitcoin is fairly new whereas gold has been traded for millennia. Gold is gold, it may come in different forms like jewellery, coins or bars but all these forms are evaluated the same way. Bitcoin on the other hand might be the first Cryptocurrency but it competes with 1,400 cryptocurrencies that are valued differently. There is no certainty that bitcoin will not be replaced by a better cryptocurrency.