By Sumit Roy from ETF.com

14 September 2017

 

“Digital gold,” “gold for millennials” and “gold 2.0” are a few of the ways bitcoin has been described. The exploding cryptocurrency has many selling points, but one of the most prominent is that it is a newer, better, more advanced version of the venerable yellow metal.

But is that really the case? Has bitcoin eclipsed gold to become the preferred alternative to government-issued fiat currencies?

With gold ETFs suddenly surging to their highest levels in a year, and with the first bitcoin ETF closer to reality, now is as good a time as any to delve into the bitcoin versus gold debate.

Gold Dwarfs Bitcoin

While bitcoin and gold share many similarities, one thing that sets them apart is the numbers. The gold market is magnitudes larger than the bitcoin market. The value of all the gold that’s ever been mined exceeds $8 trillion. The value of all the bitcoin that’s ever been mined is $76 billion.

In fact, the value of the gold mined just in the first half of this year―$68 billion at current prices―is almost equal to the value of all the bitcoin in existence.

Gold is held by countless individuals and institutions. About 89,200 metric tons, or $3.9 trillion worth, is held as jewelry, according to the World Gold Council. Approximately 40,000 metric tons, or $1.7 trillion worth, is held as private investment; and 31,500 metric tons, or $1.4 trillion worth, is held by central banks around the world.

Meanwhile, ETFs hold about $92 billion worth of gold, small potatoes in the broader gold market, but still a substantial sum.

More Room To Grow

Though the bitcoin market can’t boast anything close to those numbers, that’s not necessarily a knock against the digital currency. Proponents of bitcoin would argue that the relatively modest size of the digital currency market compared to that of gold means the former has much more room to grow.

After all, even after rising 400% this year alone, bitcoin is still dwarfed by the yellow metal. That’s why you have some bitcoin analysts calling for even more eye-popping gains for the digital currency, such as Fundstrat’s Tom Lee, who forecasts prices could climb another tenfold in the next five years.

Bitcoin “has a lot of characteristics that are very similar to gold and will ultimately make it attractive as an alternate currency,” he said on CNBC. “It’s a good store of value; the encryption and distributed ledger not only act as protection, but it has an industrial use in that it could replace a traditional payment platform.”

“The supply of bitcoin is starting to slow, and within the next two or three years, the number of coins discovered, mined, or rewarded will actually be slower than the amount of gold discovered, so bitcoin will actually be a rarer unit than gold,” Lee added.

 

New Investment Avenues

Lee still sees bitcoin as “an underowned asset, with the potential for huge institutional sponsorship coming.”

In the coming months, bitcoin futures and options are expected to launch on regulated exchanges, opening the door to the bitcoin market for institutions and other investors that previously couldn’t be involved.

That could be followed by the first U.S.-listed bitcoin ETF, enabling investors to buy bitcoin from their brokerage accounts just as they would a stock. If that happens, some of the money that would otherwise be headed into gold ETFs could instead head for bitcoin ETFs.

Bitcoin bulls argue that these new avenues for investment will enable bitcoin to match and eventually surpass gold as the world’s predominant alternate currency or safe haven.

Not So Fast
As rosy as the outlook for bitcoin seems, some analysts caution that it’s too early to make any certain claims about the digital currency’s future. Analysts Tom Price and Susan Bates at Morgan Stanley acknowledge that bitcoin has many desirable properties, but say it still has yet to be tested.

“Both gold and bitcoin possess the properties of a viable currency: a widely accepted medium of exchange; are fungible, durable, portable, divisible and scarce,” they wrote in a recent report. “But unlike gold, bitcoin exists within a system that can instantly transfer value worldwide, plus supply is constrained, potentially underpinning its long-term price.”

They went on to say that for global money transfers, bitcoin is “better than gold” and “probably better than conventional fiat currencies too” due to low transaction costs.

However, when it comes to being a hedge against inflation and uncertainty, it still needs to be tested. The analysts noted that competing cryptocurrencies will continue to emerge, which is a bearish risk for bitcoin prices.

“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,” the analysts remarked.

While bitcoin “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,” they concluded.

 

This article by Sumit Roy was originally published at ETF.com.




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