Whether Bitcoin can be considered a legitimate form of money is now a stale debate.
It functions like money; people believe it’s money; and it can be converted into money on a global scale. Bitcoin is money. But how robust is it? Does it satisfy all the characteristics we seek in money? If so, to what degree does it embody these characteristics?
And how might Bitcoin compare with one of the oldest safe-haven assets whose value has withstood all financial calamities spanning the globe across all eras of human existence: that is, gold?
Bitcoin’s rise has been phenomenal this year. From just over $1,000 in January, it is now up to $6,000! In contrast, gold has risen only 12%. However, this makes for a poor comparison, as it confuses intrinsic value with speculative fervor. We need to size-up Bitcoin against the characteristics that define money: durability, portability, intrinsic value, and unit of account.
That’s exactly what Goldman Sachs did, and here’s what they came up with:
- Durability: Gold clearly wins, as cryptocurrencies are vulnerable to cyberattacks, regulatory risk, and infrastructure and network risks. As we’ve seen from the aftermath of Hurricane Irma and Maria, damage to infrastructure makes all electronic transactions (like cryptocurrency) non-functional.
- Portability: Bitcoin is the better of the two, as gold’s weight makes it more difficult to transport. It requires greater security and may be subject to high import taxes. Bitcoin transport, in contrast, is instantaneous.
- Intrinsic Value: Goldman favors gold over “cryptocurrency” but this assessment is somewhat unclear. Although there is a finite supply of gold in the Earth’s crust, making it “scarce,” one of the defining characteristics of money, the same can be said about Bitcoin; it too has a limited supply.
However, this is not necessarily the case for all cryptocurrencies. Not all cryptos have limited supply. If a cryptocurrency can easily be created, and if its generative process has no limit, then there’s no scarcity. Without scarcity, there’s no intrinsic value. And there’s no way to assess real supply/demand on a macroeconomic scale, as more can be created...just like cash. In this scenario, gold is superior.
- Unit of Account: Gold has proven better at maintaining purchasing power; it’s daily volatility being much lower. As a new currency--one fueled by speculative mania--Bitcoin’s volatility has been extreme, exactly seven times more than gold!
In Goldman’s final assessment, the yellow metal wins.
This isn’t surprising, as gold has revalued itself in times of financial and currency crises throughout history. Gold is a safe haven, and it’s what people run to during times of crisis.
As Goldman analysts Jeffrey Currie and Michael Hinds write:
“Precious metals remain a relevant asset class in modern portfolios, despite their lack of yield...They are neither a historic accident or a relic...Looking at properties such as durability and intrinsic value, they are still relevant even with new materials discovered and new assets emerging, such as cryptocurrencies.”
Short- to medium-term gold demand is driven by uncertainty and fear. Investors tend to increase gold exposure in their portfolios in times of crisis. But long-term gold demand is driven by the need for sound wealth accumulation. We see this happening in emerging countries like China, whose rising income levels will support gold prices in the near future.
Americans, many of whom are easily distracted by the empty valuations of the stock market and the false promises of the US dollar, have yet to catch up with the smarter investors who base their investments on a long-term vision of “real” supply and demand and “real” intrinsic value--investors, in other words, who buy precious metals for its solid fundamentals as a time-tested safe haven.
Don’t get left behind. When the market crashes, you’ll not only feel relieved to be in possession of a safe-haven asset, you’ll be in the company of smart money investors whose gold and silver assets will rise as everything else falls.