In a publicised statement in October 2017, investment bank Goldman Sachs denied speculation that pointed to Bitcoin as the new gold. The bank noted that despite the recent popularity of cryptocurrencies, gold as a precious metal “wins out over cryptocurrencies in a majority of the key characteristics of money.”
However, by January 2018, the investment bank caved in to growing support for Bitcoin, stating in a nine-page report that the cryptocurrency is a good safe haven asset and, indeed, the new gold.
In truth, Bitcoin and other cryptocurrencies have been as polarising as they have been ubiquitous in headlines over the past year. This article explores the two sides of the cryptocurrency debate, and gives an overview of how different cryptocurrencies today will fare as investment assets in the months and years to come.
For starters, gold has its roots as an asset nearly 4,000 years ago and has been a major factor in the world’s development and economy. It was first used as a form of currency beginning in 564 BC but the Telegraph reports that by the end of the 19th century, all major countries except for China had switched to using it as a standard for valuing paper currencies.
These days, however, gold is primarily used as a trading and investment asset through bullion, jewellery, and financial instruments. It is also used as a safe-haven asset, designed to protect against inflation and downward turns in the stock market.
On the other hand, cryptocurrencies are digital or virtual currencies designed to work as mediums of exchange, much like the US Dollar or Chinese Yuan. The main difference these have against normal currencies is that they are designed to be immune to hacking and inflation through blockchain.
Although institutions are beginning to accept cryptocurrencies like Bitcoin or Ethereum as a mode of payment, the majority of financial activities surrounding cryptocurrencies are in the context of currency trading and investments.
This Century’s Gold Rush?
The values of different cryptocurrencies have soared to new heights over the past year, with Bitcoin, Ethereum, and Ripple leading the way. With such developments, investors across the world are looking into getting a piece of the cryptocurrency pie, with many likening this movement to this century’s gold rush. This supports the idea that cryptocurrencies and gold are similar in a variety of ways.
FXCM clearly points out that gold has no expiration date and can be held for as long as an investor would like to, a characteristic that cryptocurrencies share. Both can also be traded by themselves or through derivatives like exchange-traded funds (ETFs), which are marketable securities that use the value of an underlying asset – such as gold or a cryptocurrency – for trade.
In addition, both gold and cryptocurrencies are considered speculative investments, with their value not tied to stock market movement. In this way, many have considered cryptocurrencies as this century’s safe haven asset, albeit being purely electronic. Continuing volatility among many of the major cryptocurrencies today means that it is also better used as an investment asset than as a means to purchase goods or services.
Despite these characteristics of cryptocurrencies and the current rush for them, many still maintain that they will definitely take a while to replace gold, if at all. This is because cryptocurrencies are still a relatively new phenomenon compared to a well-established asset like gold, with plenty of institutional investors, stability, established trading systems, and easy liquidity.
As explained in a previous post here on ICO Examiner, cryptocurrencies continue to face challenges as markets grow and mature. This is true not only in terms of scaling but also when it comes to government regulation and with competition within the cryptocurrency market.
So are cryptocurrencies the new gold? Only time will tell for sure – but most signs today point to yes.