Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
In Just 45 Mins., Learn to Spot New Opportunities in ANY Market for FREE! - 25th April 19
If This Pattern Holds True, the US Economy Could Face the Worst Stagnation in History - 25th April 19
8 Reasons Why Investment in Education Always Pays Off - 25th April 19
Want To Earn A Safe 5% In Fixed Income? Buy Preferred Stocks - 24th April 19
Can Gold Price Rise Without a Rate Cut?  - 24th April 19
Silver’s Next Big Move - 24th April 19
How Can a College Student Invest Wisely? - 24th April 19
Prepare For Unknown Stock Market Price Action As New Highs Are Reached - 23rd April 19
Silver Plays a Small but Vital Role in Every Portfolio - 23rd April 19
Forecasting 2020s : Two Recessions, Higher Taxes, and Japan-Like Flat Markets - 23rd April 19
Gold and Silver Give Traders Another Buying Opportunity - 23rd April 19
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Is Bitcoin a Substitute for Gold?

Currencies / Bitcoin Apr 04, 2018 - 06:41 PM GMT

By: Arkadiusz_Sieron

Currencies

John Maynard Keynes once famously called gold the “barbarous relic”. The emergence of the cryptocurrencies seems to validate that thesis. Will gold survive in the digital era?


Bitcoin as Digital Gold
Let’s face it. Bitcoin and gold are similar. Both assets are rare and their supply is limited (it cannot be increase at will by politicians or central bankers). Actually, Bitcoin was conceived as the digital gold from the very beginning – the process of generating bitcoins is called “mining”. And both Bitcoin (and cryptocurrencies in general) and gold are not government-issued media of exchange – instead, both are alternatives to fiat currencies.

According to Aswath Damodaran, a valuation guru, one scenario for Bitcoin is that it will become “gold for Millenials”, i.e. it will take the role that gold has fulfilled for hundreds of years – a safe-haven asset for people who don’t trust governments & central banks and their currencies.

But There Are Important Differences
Bitcoin’s parabolic rise at the end of 2017 prompted some analysts to claim that cryptocurrencies may replace gold. They forgot that Damodaran’s vision was only a one of possible scenarios for Bitcoin’s future. And they neglected several distinctions between gold and Bitcoin. The World Gold Council has recently published an investment update, arguing that cryptocurrencies are no substitute for gold. Their reasons are that gold:

  • is less volatile;
  • has a more liquid market;
  • trades in an established regulatory framework;
  • has a well understood role in an investment portfolio;
  • has little overlap with cryptocurrencies on many sources of demand and supply

Bitcoin vs. Gold – Volatility
The Bitcoin’s enormous volatility is perhaps the biggest obstacle to replace gold. One function of money is to be a store of value such as the yellow metal – as Bitcoin moves, on average, 5 percent each day, it hardly serves as a viable medium of exchange. Actually, cryptocurrencies are much more held and used as a speculative investment rather than medium of exchange used for transactions. Gold is not money anymore, but it is definitely used as an inflation hedge and a store of value.

Bitcoin vs. Gold – Liquidity
Another important issue is market liquidity. Bitcoin trades, on average, $2 billon a day, which is is less than 1 percent of the total gold market that trades approximately $250 billion a day. The modest Bitcoin’s liquidity is partially responsible for its huge volatility. We know that Bitcoin is still young, but the gold’s established role as a monetary asset will be very difficult to dethrone. People have a status quo bias – and there are network effects in operation. Actually, as there are currently over 1,400 cryptocurrencies available, the future of Bitcoin is under question – it has “first-mover advantage”, but we cannot exclude that it would be replaced itself by better cryptocurrency.

Conclusions
We often disagree with the World Gold Council, as it has a clear bullish bias toward gold. The shiny metal and Bitcoin have some similarities, but there are not substitutes, at least not perfect. It’s not that we don’t like cryptocurrencies – we keep our fingers crossed for all alternatives to the government-sponsored fiat money (especially that blockchain technology looks very promising).

But we are not blind to obvious differences. Gold has a long history of being monetary asset behind it and the gold market is well established, very liquid and relatively stable. Meanwhile, the cryptocurrency market is young, with small liquidity and high volatility. Investors buy Bitcoin and other alt-coins not as safe-havens, but rather as speculative vehicles. Hence, contrary to some commentators, the gold prices shouldn’t be affected by rallies and downturns in cryptocurrencies. Stay tuned!

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules