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How Bitcoin and its Crypto-cousins Compare with Gold

11 January 2018

BTC and other cryptocurrencies have enjoyed outrageous fortune in 2017, and to some degree that has to arise from a herd mentality among some investors, combined with a finite supply of given cryptocurrencies. The view here is largely that it is the block chain and its varied applications which are of real interest, although the amount of energy required for solving block chain might prove to be an unexpected spoke in the wheel in terms of future growth.

By comparison with BTC and others, gold (and silver) remain more stable and are proven long term stores of purchasing power. Importantly, they are easy to understand from an investment point of view, and are unique assets in that unlike a bond or equity, gold is nobody’s liability. The value of gold is not contingent on the repayment of an outstanding debt, the income-generating properties of a business, or the revenue-collecting powers of a state, all of which influence the valuation of different classes of bond or equities in the case of listed enterprises.

Additionally, there is decent evidence that gold has a part to play in a balanced portfolio of investments that can reduce risk via delivering less-correlated returns. Can cryptocurrencies offer that? Perhaps, however it is too early to say. Schwab - Portfolio diversification discussion

Cryptocurrencies have offered huge returns of late; however they are relatively new and largely not well understood. That isn’t a fatal flaw, as plenty of investors don’t know a great deal about the detail of businesses like Amazon or Apple either, and those are examples of business that have delivered extraordinary returns too. However, in an effort to find an ‘alternative’ to fiat currencies and to branch out into the new, investors may overlook weaknesses.

The problems that stand out for investors is that unlike almost all ‘Crypto’, gold and silver are traded on a combination of regulated exchanges in the true meaning of the word, or on markets via regulated intermediaries. Huge protections exist to aid investors that are not apparent in the crypto-currency space. This will change, as regulators in major economies seek to extend their powers to the trading of ‘virtual currencies’. US Commodity Trading Commission to discuss virtual currencies in Jan 2018

Additionally, the gold and silver markets – gold in particular – are massively liquid. It is estimated that in 2010, over 70 million Troy Ounces of gold traded daily (World Gold Council, LBMA) liquidity in the global gold market.

This means that there is sufficient depth to enable real price discovery. Until December 2017, investors in Bitcoin and its cousins have only been able to speculate via buying, with no chance to speculate on a price fall. Volume on the CME has averaged just over 5,000 Bitcoins daily since the launch of the contract. It would be unfair to compare something like Bitcoin with an asset like gold whose use as money goes back to the beginnings of recorded time, but the fact is that there isn’t a lot of depth to the market at the moment, and it is tough to gauge just how hard the market would fall to clear if a large group of cryptocurrency investors decided to exit the market at the same time.

To balance that fear, it is worth noting that again, firms such as Amazon have had some huge draw-downs in value before powering ahead to huge valuations. The key will be whether Bitcoin and other virtual currencies manage to deliver what tangible currencies already do – act in some combination as a convenient, reliable and acceptable unit of account, medium of exchange and store of value. 

Nicholas Frappell
General Manager