Fervent advocates claim that bitcoin is the new, digital gold. They argue the answer to precious metals is the digital currency. They even say it could replace gold for investors as a significant store of value.
However, is it possible for bitcoin to truly replace gold in the eyes of mainstream investors shortly? Kristoffer, Inton, the Morningstar Equity Research analyst, says the answer is no.
Inton laid out five criteria for investors that gold fulfilled as part of a safe-haven investment. The analyst claims bitcoin along with other cryptocurrencies need to first succeed in those criteria to be at minimum on par with the ancient precious metal.
These criteria do not include volatility– a factor investors wish to avoid as much as they can for safe-haven investments. Bitcoin is infamous for being prone to massive bouts of volatility. In less than a year, its price rocketed to nearly $20,000 from around $4,000 before falling once more to around $6,500 now.
The five areas Inton said bitcoin must improve on its liquidity, its functional purpose, the scarcity of supply, certainty of future demand, and finally, permanence. While gold ticks every box above, Inton argues that bitcoin only manages to check two, and even that is a stretch.
Despite What Advocates Claim, Gold is Likely to Stay on Top
The first factor is liquidity. Investment vehicles must be traded often, and bitcoin is typically illiquid while crypto investors hoard their digital coins. The current levels of trading see a daily volume of nearly 0.5% of all bitcoins existing, according to Inton. Gold, however, averages over five times that volume with about 3% of all gold being traded regularly.
Next, as well as being universally recognized as a store of value, gold also has a functional purpose. Gold can be used in many things from circuit boards in computers to ornate jewelry, and even teeth replacements. The only goal of bitcoin, however, is a currency and store of value. As of now, it’s also only sometimes accepted for actual purchase as opposed to speculative trades.
However, bitcoin does have a scarcity of supply, one of the necessary components for retaining its value. In existence, only 21 million in total will exist. This rule was written into its code from the first day.
As for a future demand certainty for the digital currency, that’s still up for debate. Bitcoin has existed for less than ten years, and in this time of significant technological and political upheaval, there’s no guarantee bitcoin will be a winner in the end, even if cryptocurrencies do catch onto the mainstream. Gold, however, has an impressive track record, in being universally accepted for over five millennia of human history. It’s a safe bet for investors that won’t lose all its value one year later.
Finally, there’s the permanence to consider. This is the question of whether or not the given investment resource degrades over time. Gold is a precious metal that won’t tarnish, nor will bitcoin rot or deteriorate. However, should people widely stop using the currency, the network could degrade in quality and could even disappear altogether. Gold, on the other hand, would exist even if it was no longer used as an investment vehicle.
Inton says it’s unlikely that cryptocurrency will genuinely attract safe-haven investment dollars from gold. For cryptocurrency to threaten gold’s investment case, there would need to be additional certainty around blockchain’s use. That along with more confidence around the popularity of various cryptocurrencies over another and improved volume of trading will be needed as well.