Will Bitcoin Become the New Gold?
With Bitcoin being one of the most talked about cryptocurrencies, will this decentralized digital currency overtake Gold? We briefly explain the history of gold coins, the future of Bitcoin and how IntaCapital Swiss facilitates Gold Projects.
The Gold Standard
The first gold coins were initially struck around 550 BC by Royal Decree of King Croesus of Lydia. However as life moved on, paper currency was introduced to the world and by the late 19th century many of these currencies were fixed to gold, known as “The Gold Standard”.
The definition of the Gold Standard is where countries linked their currency to a specified amount of gold, and countries with no gold reserves linked their currency to a country whose currency was on the Gold Standard. This meant that fiat currencies were freely transferable into gold.
For countries using the Gold Standard, their money supply was linked to gold, and a legal minimum amount of gold to currency issued was employed. There are many factors under which the Gold Standard operated, but for the purposes of this blog this is just an outline.
Gold Today
Great Britain left the Gold Standard in 1931 and the United States followed but not until August 1971. Today gold is used in many products with jewellery accounting for about 74% of gold consumption.
On the investment side, gold is used as a hedge against inflation, financial market turbulence and geopolitical problems. In today’s world, the Covid-19 pandemic has seen central banks increase the money supply giving the perception that fiat currencies such as the Euro, USD and GBP were being devalued. As a result, investors have fled into gold to protect themselves from currency devaluations whilst preserving their purchasing power.
Why is gold so attractive to investors? There are a number of reasons but the fundamental reason is, it’s perceived as a commodity of stored value. For hundreds of years and up to today, investors have always seen gold as easily exchangeable, attractive in appearance, durable and importantly scarce. It is these inherent qualities that give gold its attraction and value today.
Bitcoin
Bitcoin is a digital currency and was created on 3rd January 2009 when Satoshi Nakumoto, the inventor of Bitcoin, mined the first block in the blockchain, known as the Genesis Block. The first Bitcoin transaction took place in 2010, when two Papa John pizzas were bought for 10,000 bitcoins by a certain Mr Laszlo Hanyecz.
At the time of Mr Laszlo’s purchase a bitcoin was worth a fraction of a cent, but it crossed the USD 1 threshold in February 2011. Bitcoin is still maturing as a cryptocurrency/asset and over the past decade has suffered massive volatility where double digit swings in price has not been uncommon.
Volatility
Bitcoin is famous for massive price swings, the first of which occurred in April 2011 when the price jumped from USD1 peaking in June at USD32, a staggering gain of 3,200%. However, by November of that year, bitcoin had bottomed out at USD2.
Bitcoin began 2013 trading at USD13.40 and reached USD220 by the beginning of April, before receding to USD 70 by the middle of the same month. However, by October bitcoin was trading at USD123.20 reaching a high of USD1,156.10 in December before virtually halving in price 3 days later to USD760.
Bitcoins price has continued to fluctuate massively over the years, having to contend with problems in their ecosystem, fraudsters, scams, hacking and absence of any regulation. However, thanks to some serious investment, these problems have become a thing of the past.
Today
There is only a finite supply of bitcoin. The total amount of coins that can be mined is 21 million of which 18.5 million have been mined and estimates suggest of these 20% have been lost forever reducing overall supply.
At the time of writing Bitcoin stands at USD62,151.20, the highest it has been since April of this year, despite losing 17% on 7th September and despite being banned from China.
America’s regulators have approved a Bitcoin ETF (Exchange Traded Fund), despite bitcoin not being regulated. An ETF mimics the price of an asset allowing investors to buy that asset but eliminating any personal trading. In the case of Bitcoin, the ETF would also erase any complex security and storage procedures.
This new ETF, which starts trading on the New York Stock Exchange on Tuesday 19thOctober, is expected to attract a serious number of new investors into the Bitcoin market. Analysts are predicting a price of anywhere from today’s price of USD62,151.20 up to USD90,000 in November and then amazingly after a correction up to USD150,000 to USD200,00 early next year.
Bitcoin & Gold – Conclusion
The question many investors are mulling over is “Will Bitcoin become the new gold?”. For many, Bitcoin is still a young digital currency and needs to grow and mature before any comparisons can me made. Pro bitcoin analysts are already saying bitcoin is now a hedge against inflation. However, the Bank of England and HSBC both say bitcoin has a long way to go.
Gold is still way ahead in the custodial and security stakes. Despite much publicising that the cryptocurrency world is so much safer, there have been massive hacks already this year, so perhaps a cryptocurrency is not as safe security wise as we are led to believe.
Official statistics show that 2 ½ to 3 thousand tons of gold are mined each year with an estimate of 190,000 tons being above ground. There 18 ½ million bitcoins that have currently been mined, with a maximum availability of 21 million. So what happens when Bitcoin issue no more coins??
Gold is priced in different currencies in individual markets all over the world. This means that gold can be hedged against currencies, whilst bitcoin is priced just in the US Dollar and therefore comes nowhere near the flexibility of gold.
As a hedge against the future, gold is so much less volatile than bitcoin which taken together with all the above points shows that bitcoin has yet to become the new gold.
IntaCapital Swiss & Gold
At IntaCapital Swiss we have facilitated projects within the mining industy, specifically gold. Learn more from our case study, which benefited from a Collateral Injection that would Guarantee the clients’ suppliers for the payment of Gold export from Brazil to Canada.
