Gold vs. Bitcoin
Comment of the Day

August 16 2017

Commentary by Eoin Treacy

Gold vs. Bitcoin

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

' you're a commodity analyst, and you don't track bitcoin? Should I be worried about that?' – bitcoin enthusiast…

Better than gold? So for global money transfers – bitcoin's a good medium. Indeed, for this function, bitcoin's better than gold; probably better than conventional fiat currencies too (i.e. transaction costs). But the popular view that this immature currency is also superior to gold as a hedge against inflation/uncertainty, still needs to be tested. Some claim that the protocol limiting bitcoin’s supply growth rate + total that can ever be created (i.e. 21 million, by 2140), underpins its value. But if bitcoin is successful long term, we should continue to see competitor cryptocurrencies and market strategies emerge (Global Financials & Payments: Blockchain: Unchained? 16-Jun-17) to exploit the new economic rent – a bearish risk for bitcoin's price (i.e. few barriers to-entry). And what of uncertainty? Over millennia, gold has demonstrated its ability to endure and preserve value under all circumstances. By contrast, bitcoin's global platform literally requires the lights to stay on.

It’s a risk: Gold’s value to financial markets has already been incrementally marginalized over the centuries, by the rise of trade-/productivity-backed fiat money. Bitcoin is the latest money to offer gold’s long-standing capabilities + some other unique benefits. While it too may somehow undermine gold’s demand outlook, the rate/scale of the shift depends on the willingness of investors to engage bitcoin/cryptocurrencies. And willingness first requires a time-consuming, trust-building exercise.

Eoin Treacy's view

Here is a link to the full report.

Gold is a store of value because of its immutability, relative scarcity, beauty and global acceptance as a fungible asset. The fact it has history on its side as a store of value ensures there will always be investment interest in the “barbaric relic”. 

Bitcoin shares similar characteristics by design but it does not have history on its side and is reliant on internet connectivity. The world has come a long way in the last 30 years but the number of instances where governments have successfully turned off the internet, not least during African elections, has increased. That acts as an inhibitor to bitcoin’s safe-haven status in extremis. 

Nevertheless, the most compelling argument for bitcoin is that it represents a digital asset whose value is dictated by faith in its evolving network. In effect, the price of bitcoin might be considered the economic rent on the blockchain. It is a digital asset for a digital economy. 

The hard fork at the beginning of the month introduced the SegwitX2 fix which doubles the size of blocks and speeds up the network. This demonstration that the bitcoin market can be adaptive to emerging market forces has helped improve confidence which resulted in higher prices.  

I’m not at all sure it is appropriate to conflate gold and cryptocurrencies. They might have similarities on paper but, are very different. Bitcoin will eventually have an existential crisis moment, either because of war, law, regulation or cosmic radiation. However, there is little evidence of such concerns right now as it continues to hold the breakout above $3000. 

Back to top

You need to be logged in to comment.

New members registration