There are signs that bitcoin could be taking over from gold as a safe haven.
The question of whether bitcoin could oust gold as the leading asset of choice for difficult times is one some investors are asking, as economic and geopolitical risks pile up and the search for safe havens continues, preferably in assets not correlated to equities.
For Clem Chambers, chief executive of stock research site ADVFN.com, the answer is yes – bitcoin is Gold 2.0. ‘Crypto, and right now bitcoin especially, is the new gold. It is better for what gold-lovers like to do with gold – store it for the day before the end of the world when they expect gold will be the only thing that will retain value.’
He continues: ‘There is a market need for an asset as insurance against disaster, and gold has filled that niche for a very long time; it is now losing the niche to bitcoin, and losing it fast.’
On the face of it at least gold and bitcoin could not be less alike: one is tangible while the other is not, one is relatively scarce while the other is a ‘worked-up’ product, created in its entirety by humans.
Bitcoin true-believers say it is digital gold because of its property of fixed supply – there will only ever be 21 million bitcoins, with each coin subdivided into 100 million satoshi. Indeed, the computer mining process to verify bitcoin transactions appears to be taken straight out of the gold bugs’ playbook.
Adrian Ash, director of research at Gold broker Bullion Vault, is not convinced by the rarity valuation argument. ‘Limited supply could equally be true of other goods and assets, and it is not clear why that gives something value.
‘Gold 2.0 is an interesting idea but misses the point – bitcoin couldn’t be less like gold. Gold’s essence is its physicality and indestructability.’
Roots of money
Precious and semi-precious metals became money once society had already arrived at the notion of value as an abstraction, made necessary by the growing division of labour as human societies advanced economically.
Gold became a universal equivalent that could be exchanged against all other commodities as a store and measure of value. In the final analysis, that value could be gauged by the cost of extraction and bringing to market.
There’s a certainty, then, about gold that doesn’t exist with government fiat, and perhaps it is in that context that bitcoin’s cheerleaders hope it too will be seen. You can’t simply conjure up more gold by passing a law.
However, the popular idea that gold has intrinsic value is also wide of the mark. Solid as gold is, it lacks substantive industrial uses; around 15 per cent of total supply is used industrially, compared to 60 per cent for silver and 80 per cent for platinum.
‘Gold’s use is to be owned. Bitcoin’s use is to buy illegal stuff outside of the legal monetary system,’ Ash maintains.
However, Chambers believes there was a spike in the bitcoin price in late July due to ‘a group of insiders buying bitcoin for Chinese yuan before the devaluation took place’, and he thinks there may be more to come. Capital flight, using bitcoin as the conduit, is also apparent in Venezuela and Iran.
A matter of trust?
In a time when many people no longer trust governments and bankers in the wake of the financial crisis of 2008/09, bitcoin is seductively attractive because of its lack of centralised authority, its governance embedded in computer code and its immutability.
Just like gold, bitcoin generates no income, and just like gold it has no intrinsic value, so in those respects they are alike. Also, neither are everyday currencies, despite bitcoin’s stated aim of being ‘peer-to-peer electronic cash’.
However, as a trusted computer network to transfer value, bitcoin, or another cryptocurrency that addresses its perceived design weaknesses, could conceivably emerge alongside existing fiat money.
Against that, it remains difficult to see a time when governments and states, voluntarily at any rate, cede their monopoly over money issuance.
Bitcoin adherents who are not sure how the money thesis will play out often tend to fall back on the gold analogy.
Ash sees the state monopoly over money issuance as the main barrier to cryptocurrency adoption. But overthrowing gold as the premier store of value is even harder for Ash to envisage. ‘Gold has been seen as the ultimate commodity in all cultures and ages as a store of value.’
Bitcoin supporters rebut the problem that its price volatility undermines its claim as either a good store of value or a means of exchange, let alone a unit of account for marking up goods and services. As the market matures and adoption increases, volatility will fall – or so goes the argument.
When gold – and maybe bitcoin – does best
‘Gold does best when people lose their faith in central bankers,’ Ash contends.
But that observation could also be a positive for bitcoin. The total value of all the gold that has ever been mined is $7.5 trillion. For bitcoin to reach an equivalent ‘market capitalisation’, one bitcoin would have to reach a price of around $330,000.
Bitcoin might not replace fiat money, but its allure, paradoxically as a ‘hard asset’, could grow as the worries confronting investors multiply. ‘Bitcoin is new wealth in the same way that a new gold mine would make the world wealthier. There is no reason that bitcoin can’t be worth what all the gold on earth is worth, or much more,’ says Chambers.
But he adds that it’s not a zero-sum game. ‘Bitcoin has a better use case than gold but the use case of bitcoin is not exactly the same as gold and will not make the yellow metal obsolete.’