Is Bitcoin the new Gold?

Figures

Photo by Overearth / Shutterstock.com

Much has been written about how bitcoin has taken luster and market share from gold over the past decade. But has the death of gold been much exaggerated? Les Nemethy asks.

As Herbert Hoover, the 31st President of the United States, once famously said, “We have gold because we cannot trust governments.” Gold and bitcoin are both ways of opting out of the fiat currency system. Lebanese-American writer and mathematical statistician Nasim Taleb once called bitcoin an “insurance policy against an Orwellian future,” but it could just as easily be said about gold.

Central banks can print fiat currencies in virtually limitless quantities. The supply of gold and bitcoin are finite and elude government control. The number of bitcoins will gradually increase from the current 18-19 million to a cap of 21 million by 2040 and thereafter be fixed for eternity. Gold stock has historically grown by one or two percent a year; after 2025, gold production is forecast to go off a cliff, as few mines of scale are being discovered.

There is nothing intrinsically valuable or useful about either gold or bitcoin. According to Warren Buffet, widely considered to be one of the most successful investors in the world, gold “gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it.” The value of both is underpinned solely by custom and trust. 

Bitcoin, being digital, has the enormous advantages over gold of requiring zero space for storage, zero expense for insurance, and is easily transferable electronically, over any distance. As we approach the metaverse, bitcoin is likely to play a role that cannot be assumed by physical gold.

Perhaps a two million percent appreciation over the past decade makes bitcoin a better investment (although bitcoin critics would argue that tulip bulbs once offered a similar performance until tulipmania ended with the first recorded asset bubble collapse in 1637).

Millennial Track Record

Gold has the advantage over bitcoin of having a track record over thousands of years, compared to barely a decade. During the latter’s short life span, there has been frightening price volatility.

Gold’s physical nature provides certain advantages: should there be a widespread power or internet failure (perhaps in the event of war or a solar flare), gold may still be traded. There is also a chance bitcoin may become more hackable with advances in quantum computing.

Several countries, including China, have recently declared bitcoin illegal, and Russia and Vietnam have banned it as a payment method. (In fairness, the U.S. Government also pronounced privately held gold unlawful in 1934 and confiscated it.)

The regulatory regime for bitcoin is in its infancy. Is bitcoin a security, a currency, or a commodity? In the United States, the answer will impact who is the regulator and what regulations will apply. New rules may diminish attractiveness. U.S. tax authorities recently required that bitcoin transactions be disclosed on tax returns. 

Because the blockchain includes a history of all past transactions, gold is perhaps a better choice for someone who wants to be totally “off-grid.”

Gold, not bitcoin, is owned by central banks. Should there be a Bretton Woods type monetary reset as happened at the end of World War II, there is the potential for an upward revaluation in the price of gold. The extensive use of gold as jewelry arguably provides a floor to its value.

Immortal Gold

Due to its uniqueness on the periodic table of elements, there is no element as immortal: gold does not tarnish, rot, evaporate, or decay. It is attractive, scarce, and dense. Contrast this with bitcoin, where more than a thousand cryptocurrencies are vying for market share. Gold has a much larger moat vis-à-vis its physical competitors than bitcoin vis-à-vis its virtual competitors.

Gold and cryptocurrencies are not mutually exclusive. While I favor the risk and return profile of gold (with its 6,000 years of history, less volatility, and in my opinion, good upside potential in today’s inflationary negative real interest rate environment), I also hold a small amount of crypto.

I have two reasons for doing so: one, as a speculative asset; and two, its advantages related to easy transferability. It is a mistake, in my opinion, to have zero exposure to bitcoin, just as with gold. In my case, I have heavy exposure to gold and light exposure to bitcoin. 

This article would be incomplete without mentioning a feature of certain cryptocurrencies such as ethereum (but not bitcoin): programing of smart contracts- opens a horizon as revolutionary as the internet, enabling innovations from decentralized finance to the metaverse. Long-term, this will be the real significance of crypto, blockchain applications we cannot even envision today. 

Disclaimer: This article is for educational purposes only and must not be construed as investment advice. Investors should obtain their own financial advice.

Les Nemethy is CEO of Euro-Phoenix Financial Advisers Ltd. (www.europhoenix.com), a Central European corporate finance firm. He is a former World Banker, author of Business Exit Planning (www.businessexitplanningbook.com), and a previous president of the American Chamber of Commerce in Hungary.

This article was first published in the Budapest Business Journal print issue of November 19, 2021.

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