Bitcoin has experienced an incredible run-up in price in recent years. This has caused many to speculate that crypto currencies are the new gold. Practically since paper currencies became the norm, investors have been searching for a medium of exchange and store of value that’s not issued (and manipulated) by central banks and national governments. Some believe we may have found it in Bitcoin.
Are crypto currencies the new gold? The argument is increasingly being made. But is it true?
Let’s examine the facts…
BITCOIN: THE NEW COOL INVESTMENT
In today’s world, practically any new concept that emerges on the World Wide Web becomes “cool” almost instantaneously. The concept of a cyber currency has natural appeal, since it fits neatly within the dramatic rise in the volume of online business. As well, a currency that easily transcends national borders and isn’t tied to any single country is a powerful draw.
But perhaps the biggest reason for the growing popularity of Bitcoin has been in its extreme price action. When the crypto currency began trading, it opened at rough parity with the US dollar. Bitcoin has recently traded at over $7,700. This price explosion has generated massive profit appeal, and naturally, rising investor interest.
However, this kind of price increase over just a few years is almost certainly unsustainable. Along with the dramatic rise in price, there’s also been increasing speculation that Bitcoin is in a bubble.
Perhaps this means there’s even greater profit in the future. But there’s an equal likelihood of a massive price crash.
Is Bitcoin set to replace gold as the preferred alternative currency? Has it become the new cyber gold?
It’s unlikely – here’s why…
GOLD HAS WITHSTOOD THE TEST OF TIME
Bitcoin was launched in 2009. While it’s recent price-performance has certainly been impressive, it hasn’t been around long enough to establish itself as a valid currency, let alone a timeless one.
By contrast, gold has held monetary value for thousands of years. It has represented a store of wealth and a medium of exchange going back at least to biblical times. It has especially been popular among royalty, nobility and the wealthy. Throughout history, these groups have always held a substantial amount of gold.
In fact, the wealthy have owned gold long before popular current investments, such as stocks and bonds ever existed. It even predates paper currencies by several thousand years. Put another way, gold was money before there was money, at least way we understand money today.
“Old money” in particular is keenly aware of this history. Gold has withstood the test of time, and proven its value. The analogy is often given that 100 years ago an ounce of gold bought a high quality men’s suit, and it still does today. That’s something of a cliché, but it’s also entirely true.
Gold has even risen in value against certain important commodities. For example, in the early 1970s, when a gallon of gasoline was less than $.30, and an ounce of gold was $35, one ounce of gold could purchase about 115 gallons of gasoline.
Today, with gasoline at about $2.50 per gallon, and gold at nearly $1,300, an ounce of gold now buys over 500 gallons of gasoline.
Perhaps decades from now the situation will be similar with Bitcoin. But since it has only been around for less than a decade, there’s simply no basis to make that assumption.
GOLD HAS WEATHERED COUNTLESS CRISES
Beyond the fact that gold has retained monetary value for thousands of years, it has also weathered countless crises. This includes wars, famines, plagues, depressions, inflations and deflations, political upheavals, and even the rise and fall of empires.
The point about empires is particularly significant. In today’s world, people commonly assume that governments give money its value. But something else is at work when it comes to gold. After all, gold has survived the rise and fall of the empires of Egypt, Babylon, Persia, Greece and Rome, and various dynasties in China.
More recently, it has outlasted the British Empire, the Soviet Union, and the Third Reich. Based on that history, gold is entirely likely to retain monetary value long after today’s great nation states, including the United States, have disappeared.
The metal has also survived and thrived through thousands of calamities. This includes the Dark Ages, the Black Death in Medieval Europe that claimed tens of millions of lives, the Napoleonic wars, both world wars, the Great Depression and the Cold War. More recently, it has survived several energy shortages, the inflation of the 1970s, the Dot-com Bust and the Financial Meltdown.
In many of those crises, the price of gold actually skyrocketed. For example, during the inflation of the 1970s, gold began the decade at $35 per ounce. But it peaked out at more than $800 per ounce in 1980. The situation was similar more recently, when the price of gold reached its all-time high of nearly $1,900 in the waning days of the Financial Meltdown.
Gold not only survives crises, but it’s often the go-to investment in the process.
Being born only at the tail end of the Financial Meltdown and existing during an economic expansion, Bitcoin has no history to match against gold.
GOLD IS TANGIBLE
This is the quality that makes precious metals virtually unique among all investment assets. Stocks, bonds, certificates of deposit and even treasury securities are all paper assets. Each represents a claim on the assets of the issuing party. That means that the security itself has no intrinsic value. The value of the asset rests entirely on the willingness and ability of the issuer to pay.
That actually creates another limitation. Paper assets are ultimately repaid in other paper assets. For example, when you redeem a US Treasury security, you are paid in currency. That currency itself is another paper asset, or increasingly, a digital asset.
And while stocks represent a fractional ownership in the assets and productive capacity of the issuing company, they can only be converted to currency. You won’t receive your fractional interest in the company in exchange for the stock.
That’s the specific factor that gives precious metals their enduring value. They are the only asset that is not someone else’s liability. They represent value in and of themselves, because the metal itself is the asset.
This is a quality that neither Bitcoin nor any other type of crypto currency can match. Though they aren’t paper assets, they are purely digital assets. Just like paper assets, they don’t represent value in and of themselves. Their entire value is the ability to convert the asset to currency.
GOLD ISN’T SUBJECT TO SYSTEM FAILURE
One of the major reasons why investors own gold – and even flock to it during times of crisis and uncertainty – is the ability of the metal to survive system failure. Most of crises listed earlier – wars, political upheaval, depressions, inflation and depression, financial meltdowns – represent system failures.
Surviving and thriving in those failures is what precious metals do best. This gets back to the fact that precious metals represent value in and of themselves, and are not contingent upon the integrity of an issuing authority.
It’s often asserted that Bitcoin has a similar quality, since it is not issued by a central bank or national government. It is actually provided by the computer network, which includes many thousands of individuals, making it completely decentralized.
It is possible that Bitcoin will survive and even perform well in an unrelated system failure. But since Bitcoin is itself the product of a network – the block chain – it could experience its own system failure.
For example, crypto currencies do have storage method vulnerabilities. Since Bitcoin is stored on your computer, you could lose them in the event that your hard drive becomes corrupted. They can also be lost if your computer is lost.
There are also problems with third-party storage methods. Online web wallets, that store crypto currencies, have inconsistent security protocols. And since there are different web wallets, there are different levels of security involved in each. On some, the security level is excellent. But on others, security is weak.
Not only do we not know how well Bitcoin will perform during a big picture system failure, but we don’t even know how well perform it will do in a crypto currency failure.
CRYPTO-CURRENCIES AREN’T THE NEW GOLD
Given all the limitations inherent to Bitcoin, it’s obvious that crypto currencies are not the new gold. Only gold can fill the role that it does, because only gold represents a cash and carry asset that has survived and thrived for thousands of years, and in the face any number and variety of system failures.
At this point, crypto currencies, and Bitcoin in particular, seem to be part experiment and part speculation. They can very well represent the latest and greatest currency, though that has yet to be proven. That’s the experiment part.
But the speculation is equally obvious. Any investment that goes from zero to nearly $8,000 in just eight years is a speculation by definition. The crypto currencies certainly have promise, but their value as currencies has yet to be clearly confirmed. Their use as a long-term store of value is even more questionable.
What we do know however is that rapid price growth doesn’t indicate a long-term store of value. The price run up on Bitcoin is clearly overdone. But while it continues, there will continue to be speculation about its ability to replace other currencies, including gold.
We’ll get a more definitive answer in the next major system failure. Or once Bitcoin experiences a major collapse in price. That’s when we’ll find out if crypto currencies are the real deal, or just the speculation du jour.