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Why Bitcoin Doesn’t Signal the End for Gold

Tuesday, February 20, 2018

When gold merchants and suppliers talk about Bitcoin, they don’t tend to do it with all that much enthusiasm. In fact, with reports flying around that Bitcoin is the gold of the future and that investors are flocking towards it, it’s safe to say that some in the gold industry had been getting decidedly anxious during Bitcoin’s latest price surge.

Of course if they’d been paying any attention to our gold market updates in January and December, they’d know that the gold market is doing perfectly well itself, and looks to be secure as a stable long-term investment asset over 2018 and beyond.

In fact, far from competing against one another, we think cryptocurrencies and precious metals are playing entirely different sports.

Gold and Bitcoin

Over the course of 2017, the price of Bitcoin rocketed, from just under $997.75 on the 1st January to almost $20,000 at its highest point in December, before dipping again beginning the first day of 2018 at $13,480.01. From the first day to the last, it increased its value by over 740 per cent. Gold, on the other hand, rose in value against Sterling by about 3 per cent over the same time period.

If this was a competition about which commodity can rise in value the fastest, then let’s face it – we’d already have lost.

And that precisely proves our point that there’s no competition here. Gold and Bitcoin can coexist in a balanced investment portfolio. Gold is considered a ‘safe haven’ asset, meaning that people invest a small but noticeable percentage of their overall wealth portfolio in it over a long period of time. Rarely has gold risen so quickly in value that it’s been worth playing the market over a period of days, weeks or even months. When inflation is high and economies are volatile, however, the price of gold almost always rises making it a solid long term asset to hold.

The clearest example of this was during the 2008 financial crisis, when gold rose in value beyond any point it had been measured at before, and peaked some years later in 2012 at a higher price than it’s been recorded at since. Few investments will rise so predictably in value when the economy is performing so badly – and that’s precisely why gold is such a staple of a diverse investment portfolio.

It’s also highly unlikely that anybody is going to buy Bitcoin as a ‘safe’ asset to hedge against risk. With the price of Bitcoin being so volatile, it’s become almost impossible to predict what the price is going to be next week never mind in 2020 or beyond.

Volatility in the gold price

If you were to compare a Bitcoin price chart against a gold price chart it’d be fairly easy to see which is the more volatile. With Bitcoin, the exponential rise that was seen over 2017 cannot possibly last. Since its opening price this year of $13,480.01, the price has fallen down to around $7,000 before recovering somewhat. It currently sits at $11,418 at the time of writing (20th February 12:00pm). The easy response to the drop (particularly for those trying to convince you to buy gold instead of Bitcoin) would be to say that Bitcoin’s over.

But of course, that would only be the case if you assumed the high November and December prices to be the default setting. In fact, taking into account that today’s price is still higher than it was through most of 2017 and indeed most of its life, there’s little that can be deduced from this other than ‘the price is less than it was a few months ago’.

That’s because Bitcoin’s incredibly volatile. Unlike fiat currencies, commodities, shares, precious metals – and any other type of established investment choice – nobody really knows what the rules to this market are… yet. It could shoot back up in price tomorrow to its December levels, or diminish so far in value that nobody would ever use it again. Nobody knows what’s going to happen and anyone that tells you with absolute certainty that they do is pulling the wool over your eyes.

To put it into context, a common way of recording volatility is by calculating the standard deviation – the closer to 0 the figure, the less volatile the commodity. Over a period from the 1st of September to the 31st of January, gold marked a standard deviation of 0.00703, against Bitcoin’s 0.05878. They might both seem like fairly small figures, but in fact that makes Bitcoin more than eight times more volatile than gold.

A volatile commodity lends itself to a very different kind of investment to one that broadly stays constant. As we learned when we looked at the differences in the gold price and other precious metals, buying gold is a way to secure a sum of money, where buying a more volatile commodity is more like betting on it.

Some investors may prefer one over the other, and some may even prefer to have a diverse portfolio including both – but a claim that they’re in competition with each other just doesn’t sit right with us.

A future with gold and cryptocurrencies

In fact, the respective benefits of gold and cryptocurrencies are so different that many new digital currencies have found ways to combine the benefits of the two. Cryptocurrencies like XGold and Goldcrypto, for instance, have devised blockchain interfaces which peg the price of their respective digital currencies to gold. These currencies take all the benefits of digital currency – a de-centralised platform through which to exchange value – and add into it a stable price backed by the original reliable investment asset: gold.

In the Roman Empire, an ounce of gold would have likely gotten you a fairly up-market toga and some accessories. Today, the equivalent value of just under £1,000 would get you a fairly nice suit. That’s remarkable stability of purchasing power for a commodity over a period of 2,000 years.

Gold has held its value through centuries, even millennia of economic innovations and financial reforms, through the silver standard, the gold standard, the arrival of paper money, the abandonment of the gold standard and more recently, digitised finances.

In short, the last thing we think gold is going to do is suddenly plummet in value because of the latest innovation in trading. In fact, we think gold is going to continue to be a sound financial investment for many years to come. As far as Bitcoin is concerned – we have no idea what’s going to happen to the price of that, but it’ll certainly be exciting to see where things go.

If you’re with us and agree that gold has a role to play in a diverse investment portfolio, then have a look through our range of gold bars and gold coins to find out more about the investment opportunities.