Crypto vs gold: the search for an investment bolt hole

Crypto assets are no longer on the fringe of the financial system. So says the IMF, which pointed out in a recent blog that the likes of bitcoin have matured from an obscure asset class with few users to an integral part of the digital asset revolution.

Millions of investors have been swept up by the enthusiasm for crypto, not least many retail savers lured by its surging prices. Some claim that in the post-pandemic world bitcoin could even displace gold as investors’ asset of choice to address extreme risks, price instability and geopolitical turmoil of the kind exemplified by Russia’s invasion of Ukraine. As Tyler Winklevoss, a tech entrepreneur, put it: “Our basic thesis for bitcoin is that it is better than gold.

Yet investors should be wary of such assertions given gold’s pedigree going back thousands of years. The comparison is easily made but, as I will argue, not necessarily justified. And the question cannot be resolved by mere financial calculus. Historical and cultural factors will play a part in perceptions of the relative merits of the two assets.

Gold, after all, has been a symbol throughout the ages of power, wealth, permanence and beauty. In the ancient world Greeks felt it recalled the radiance of the gods, while the three kings brought gold, along with frankincense and myrrh, to Christ in the manger. For many in the modern world the yellow metal continues to be the ultimate object of capitalist accumulation.

Moreover, any claim bitcoin might have to be a geopolitical hedge has been severely dented by its performance at the start of the war in Ukraine. Against a background of plunging markets gold strengthened while bitcoin fell. Today, the gold price is close to its all-time high in August 2020, while bitcoin is well below its record high last November. So much for the great crypto store of value.

Yet for Russians and Ukrainians, paradoxically, bitcoin and other cryptocurrencies have served as a genuine store of value against their plunging domestic fiat currencies — currencies unbacked by real assets such as gold or commodities — and allowed them to bypass their fragile conventional financial systems.

Crypto at war

At the same time a new use has emerged for crypto: the government of Ukraine has raised more than $100mn in crypto donations from around the world to fund its defences. For good measure, Ukrainian refugees have discovered that converting their money into crypto on a phone or hardwire device offers a more readily portable currency than gold.

What cannot be denied about crypto’s short history is that it radiates a buzz based on the potential of blockchain technology — distributed databases — to transform the financial services industry through so-called decentralised finance (DeFi). 

This innovative potential helps explain the recent interest of Silicon Valley venture capitalists such as Andreessen Horowitz, which have been launching crypto funds. Such valley folk aim to back a digital technology revolution that potentially disrupts a range of industries from banking to gaming to telecoms.

From the central bankers’ perspective there is also a negative buzz arising from the interconnectedness between crypto and conventional markets that could permit the transmission of destabilising shocks. And then there is the risk of crime, including money laundering.

In reality, bitcoin and the yellow metal have much in common, most notably in having little or no fundamental value and generating no income stream. What value they have stems from the shared belief by a sufficient number of people that they are valuable.

An important reason that investors flock both to bitcoin and gold is their innate scarcity. The total above-ground stock of gold is not much more than 200,000 metric tonnes, says the World Gold Council. And this is very large relative to the amount of new gold that can be mined and refined in a year. It is very costly to increase the stock, in marked contrast to fiat currencies where the marginal cost of producing additional paper claims is extremely low.

That makes gold particularly attractive in a period when governments have been engaging in fiscal pump priming in response to the 2007-09 financial crisis and Covid-19, and central banks have been printing money furiously. The attraction is all the greater when yields on index-linked gilts, a less speculative hedge against inflation, are negative and guarantee a loss to investors if held to maturity.

The same logic applies to bitcoin, claim crypto fans. It offers scarcity through the…

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