Much has been written about how bitcoin has taken lustre and market share from gold over the past decade. But has the death of gold been much exaggerated?
This article is organised into four sections, in which I attempt to address the pros and cons of gold versus bitcoin:
As Herbert Hoover once famously said: “We have gold because we cannot trust governments.” Gold and bitcoin are both ways of opting out of the fiat currency system. Nasim Taleb once called bitcoin (but it could just as easily be said about gold) an “insurance policy against an Orwellian future”.
Central banks can print fiat currencies in virtually limitless quantity. Supplies of gold and bitcoin are finite and elude government control. The number of bitcoins will gradually increase from the current 18-19mn to a cap of 21mn by 2040 and thereafter be fixed for eternity. Gold stock has historically increased by one or two percent a year; after 2025, gold production is forecast to go off a cliff, as few mines of scale are being discovered.
There is nothing intrinsically valuable or useful about either gold or bitcoin. According to Warren Buffet, gold “gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it.” The value of both is underpinned solely by custom and trust.
Bitcoin, being digital, has the enormous advantages of requiring zero space for storage, zero expense for insurance, and is easily transferable electronically, over any distance. As we approach the metaverse, bitcoin is likely to play a role that cannot be assumed by physical gold.
Perhaps a 2mn percent appreciation over the past decade makes bitcoin a better investment, (although bitcoin critics would argue that a similar performance was once offered by tulip bulbs).
Gold has the advantage of having a track record over thousands of years, compared to barely a decade for bitcoin. During bitcoin’s short life there has been frightening price volatility.
Gold’s physical nature provides certain advantages: should there be a widespread power or internet failure (in the unlikely event of war or solar flare), gold may still be traded. There is also a chance bitcoin may become more hackable with advances in quantum computing.
Several countries, including China, have recently declared bitcoin illegal. Russia and Vietnam have banned it as a payment method. (In fairness, the US Government also declared privately held gold illegal in 1934 and confiscated it).
The regulatory regime for bitcoin is in its infancy. Is bitcoin a security, currency or commodity? In the US, the answer will have an impact on who is regulator, and what regulations will apply. New regulations may diminish attractiveness. US tax authorities recently required that bitcoin transactions be disclosed on tax returns.
Because the blockchain includes a history of all past transactions, gold is a perhaps better choice for someone who wants to be totally “off grid”.
Gold, not bitcoin, is owned by central banks. Should there be a Bretton Woods type monetary reset, there is the potential for an upward revaluation in the price of gold. The extensive use of gold as jewellery arguably provides a floor to its value.
Due to its uniqueness on the periodic table of elements, there is no element as immortal: gold does not tarnish, rot, evaporate or decay. It is attractive, scarce and dense. Contrast this with bitcoin, where there are well over a thousand crypto currencies vying for market share. Gold has a much larger moat vis-à-vis its physical competitors than bitcoin vis-à-vis its virtual competitors.
Gold and crypto currencies are not mutually exclusive. Whilst I personally favour the risk/return profile of gold (6000 years of history, less volatility, in my opinion good upside potential in today’s inflationary negative real interest rate environment), I also hold a small amount of crypto. Two reasons for my holding crypto: (a) as a speculative asset; and (b) its advantages related to easy transferability. It is a mistake, in my opinion, to have zero exposure to bitcoin, just as with gold. In my case, I have a heavy exposure to gold, and a light exposure to bitcoin.
This article would be incomplete without mentioning a feature of certain crypto currencies (such as ethereum – but not bitcoin): programing of smart contracts – opens a horizon as revolutionary as the internet, enabling innovations from decentralised finance to the metaverse. Long term, this will be the real significance of crypto – blockchain applications we cannot even envision today.
Les Nemethy is the CEO and founder of Euro-Phoenix Financial Advisors Ltd. and a former World Banker.
This article is for educational purposes only and must not be construed as investment advice. Investors should obtain their own financial advice.