Is Bitcoin the New Gold?
Since its creation in January 2009 bitcoin has long struggled to find its place in the market. But this may be about to change.
11th January 2021 19:30 GMT
Gold is up 40% since 2018, and its clear to see why. In such turbulent times it makes sense to fall back on an asset with 3000 years of purchasing power. Its stability and constant high price make it less risky than some bonds, which are no longer the safe heaven many thought they were.
But Gold is old-fashioned. Banks don’t want to pay for security to hold their investments in as though it’s the 1800s. They want a cheaper alternative, especially as inflation looms to return with such loose monetary policy in use world-wide.
This is where bitcoin comes in. If it can be used as a portfolio diversifier to offer a safe store of value, it could win a small but constant share in the back pocket of every investor. Both gold and bitcoin pay no interest or dividend, and their prices are driven by demand from investors.
JPMorgan calculated that if bitcoin were to become as popular as gold its price would rise to $146,000, but this is unlikely to happen any time soon. The price of bitcoin is far too volatile for many hedge funds, let alone for use as good risk-management. There is also far too much fraud and theft, and the cryptocurrency is synonymous with the illegal selling of drugs online, although its not as traceless as many investors are led to believe.
But bitcoin does have its advantages. The supply of gold isn’t perfect and rises about 1.25% a year. It is difficult to liquidate, hard to transport and can’t be divided up without some serious ambition. Bitcoin has none of these drawbacks. It has a capped and inelastic supply, is sent as fast as a text, is very easily divisible and importantly is independent of any government.
It all seems to make sense. The recent rise in price has not been due to individual investors but the adoption of bitcoin from large institutions. This makes it incredibly unlikely to be banned by any government in the future and gives it a cult status as the number 1 crypto. Gold will always have its silver, and bitcoin it seems will be the same.
All this is so incredibly counter-intuitive to the early dream of replacing government money, but it has proved far too inefficient to be of any use in day-to-day payments. It is incapable of processing over 10 transactions per second, miles off the needs of the consumer finance industry.
But the important thing that bitcoin needs is a floor. If it cannot drop below a certain point because it has been adopted by so many investors, portfolios and banks, it will find itself a permanent place in the financial world. If bitcoin can find itself as a necessity and not a giddy, futuristic investment, it will be engraved in, well, gold. It could seem that in the apocalypse we won’t be trading in bottlecaps, but in bitcoin.
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