Gold v.s. Bitcoin
Since the birth of bitcoin, one question has repeatedly grabbed headline: will bitcoin replace gold? Comparing the two is inevitable as both are forms of money that are not issued by government and both offer anonymity to their owners.
Three differences are immediately evident. Gold is more stable (up 12% this year) while bitcoin is much more volatile, up six-fold this year. Volatility is good for speculators but not as positive for those who want safe keeping for their wealth. That’s why Ray Dallio, manager of Bridgewater, the world’s largest hedge fund, recently warned of a bitcoin bubble and how he favoured gold over the cryptocurrency.
Second, the gold market is much larger, with a value of more than $7 trillion versus about $100 billion for bitcoin, no doubt one of the reasons why it is much less volatile. A larger market brings in more participants which helps to ensure liquidity.
Third, gold has been money for a very long time and has proven itself. The first record of gold being used as money is from around 700 B.C. when the Lydians combined it with silver to form electrum coins. Its use and its value have survived every conceivable political, economic, financial and natural disaster throughout the world. Bitcoin is less than 10 years old.
The latest to weigh in on this question is Goldman Sachs (GS) which, in a research note entitled ‘Fear and Wealth’, has concluded that gold is a better store of value than bitcoin. Examining gold and bitcoin against the key characteristics of money, the GS report concludes that “precious metals remain a relevant asset class in modern portfolios, despite their lack of yield.” As the level of uncertainty increases, GS expects investors to increase their exposure to gold. In their view, fear is the medium to short-term driver of the gold price. The long-term driver, Goldman Sachs believes, is the accumulation of wealth and the need to preserve it.
Goldman Sachs looked at four key properties of a long-term store of value–durability, portability, intrinsic value and unit of account–concluding that the reasons why gold was originally adopted as a store of wealth remain relevant today. Here are their ratings:
Durability: While both require expertise for correct long-term storage, gold wins because cryptocurrencies are vulnerable to: hacking of online wallets or the user’s computer or smartphone; regulatory risk; and internet infrastructure risk during a crisis (as in Puerto Rico).
Portability: Transferring bullion can be expensive given its weight, its need for a high level of security, and high import taxes in some countries such as India. In contrast, bitcoins are much faster and cheaper to move.
Intrinsic value: There’s a limited supply of gold and other precious metals in the Earth’s crust, whereas in the case of cryptocurrencies, it’s easy to create new ones, meaning there’s effectively no control over supply and no intrinsic value due to rarity.
Unit of account: Gold is better at holding its purchasing power and has much lower daily volatility. Bitcoin/dollar volatility has averaged almost seven times that of gold in 2017, GS calculates.
The Goldman Sachs authors also conclude that these factors “clearly illustrate that Bitcoin as a unit of account and medium of exchange is nowhere near as favourable as it first appears.”
Is gold that really that immovable? Goldman Sachs found gold was only at a disadvantage to bitcoin when it came to portability. Bullion is often accused of being bulky and therefore dysfunctional as a form of money. However, there is one factor commonly overlooked by those who make this argument; the size of gold bars and coins relative to their value. A kilo of gold (about 2.2 pounds) is about the size of your IPhone but it’s worth about US$40,000.
In our view, investors need to be clear about their motives before deciding where to put their savings. For security, the answer appears to be gold. For the potential of large speculative gains, bitcoin may be for you, if you have the stomach for risk and some extra funds you can afford to lose.