Buy Gold or Bitcoin

The Bitcoin Rush

Simply put, gold is an element. It has been in use in society for around 4000 years. Historically it was used as physical money but today is primarily considered an investment. The price of gold tends to increase over time in line with inflation, with spikes during times of economic uncertainty. The highest all-time price of gold per ounce is US$1896 and is currently sitting at US$1,508 per ounce at the time of writing. Bitcoin was first released just over 10 years ago as one of the first cryptocurrencies. It exists as charged electrons on silicon chips, only to be accessed digitally from anywhere with internet access and it functions both as money and as an investment. In contrast to gold, the price of Bitcoin is much more erratic where fluctuations of hundreds of dollars a day are common, whatever the circumstance. Bitcoin’s all-time price high for a single Bitcoin is US$19,870 but is now hovering around US$8,444 per Bitcoin.

The wild and erratic nature of cryptocurrency prices are dictated by bullish investors distorting prices beyond natural for its intended use. The bull market of 2018 provides evidence that prices were indeed inflated, due a correction and as media interest fell away experienced a brutal drop. Where does this leave us when thinking of Bitcoin as money or even as an investment?  

Gold Vs Bitcoin

Bitcoin enthusiasts claim close comparisons with gold such as the fact both need "mining", both are scare with a limited amount available for circulation, there is no third party risk to ownership (perhaps with the caveat of continued electrical supplies and internet access), both are liquid, recognised globally and have low transaction and cross border fees (if any for those going directly peer to peer instead of via exchanges).

When compared to gold, Bitcoin is certainly the more volatile asset and cryptocurrency has more of a chance of offering a significant return on any investment. Having said that, it also is much more likely to significantly depreciate. This is because Bitcoin is considered a risky asset; it could make an investor a hefty return, but it could also see a massive loss. Gold on the other hand, is a “safe haven” asset and It will hold its value relatively consistently over time. Gold won’t offer significant yield or risk, but the point of investing in it is to secure wealth. A gold coin from 1912 will have the same purchasing power today as it did when it was struck. Compared with other assets such as cash and stock, one can appreciate the consistent staying power of gold. Bitcoin fans will claim cryptocurrency can be a safe haven asset but recent prices dictate otherwise and we discuss a little later why we disagree. 

There is a famous saying from J.P. Morgan that "gold is money, everything else is credit" so can we go as far as saying Bitcoin is the new gold? Can it function as money both on a peer to peer level but also institutionally in order to maintain a global financial system?  

For something to function as money it really needs to be as boring as possible with very little fluctuation in value (at least over the short term). Take for instance the ability of prices in the crypto market to fluctuate rapidly and significantly with 20% price swings being commonplace and 2018 providing a drop of 80% between January and September, for this reason alone Bitcoin could not currently replace traditional money. 

Finally, both gold and Bitcoin suffer from a fate of scarcity which puts some physical limit on the market. Traditional currencies do not have this limit and appear to be able to be printed until infinity. Printing more money has been necessary to maintain the global financial order but the sustainability of the stimulus activity from central banks could be starting to show cracks with negative interest rates commonplace. As gold does not function as day to day money it would be irrational to claim Bitcoin could replace traditional currencies outright. There is no reason to suggest that Bitcoin could not co-exist with other currencies offering investors more choice and diverse options. 

Real World Difficulties 

To illustrate why we can currently disregard Bitcoin as money (that's not to say in the future) let's use an example where a property is used as security on a debenture from a bank. Instead of the bank providing pounds sterling they provide the equivalent in Bitcoin to the successful applicant. This collateral agreement is a well-established method for banks to expand, issue and print more money and grow the economy so why would this be any different with Bitcoin? As part of the process experts will carry out an assessment of the security assuming a certain degree of price stability, providing a property valuation and subsequent release of funds.

If we are issued crypto for our property two things can happen if the price fluctuates wildly.  

1. The cryptocurrency increases in value by a significant amount making the property we handed over worthless to the bank. This is very good news for the customer but for the bank it is disastrous. If this were to happen on a national or internationally scale the financial world would self-implode. 
2. On the other hand should cryptocurrencies take a dive in price, the customer will end up bankrupt with thousands of coins that couldn't even buy a load of bread. The bank at this point would take a huge profit but for anyone who thinks beyond myopic corporate goals would see financial turmoil in the near future.  

This is exactly where traditional money and gold shine as prices are fairly stable and arguably boring in comparison. This is a huge hurdle for Bitcoin and the other coins to overcome as it requires a certain degree of inertia, mass acceptance, ease of use, regulatory approval and elimination of hype. The final point may be the biggest problem of all as novice and amateur investors have lost a lot of money proclaiming expert status following the consumption of information on Reddit, social media or crypto affiliate sites. If Bitcoin prices and the other cryptocurrencies stabilise in price and become "boring", there is scope for its use as money both privately and in the corporate environment. Time will tell here whether the hype dies down far enough giving time for prices to normalise. 

Safe Haven? 

The bull market seen in 2018 and the subsequent crash provides evidence that the elevated prices were indeed led by investors talking up the price rather than prices dictated by real value which is not typical of a safe haven asset. Bitcoin is struggling to maintain its emerging status of a safe haven asset as prices continue to are fall whilst geopolitical and economic risks increase.

For any gold bugs reading this they will know that gold as enjoyed price records in 72 currencies in 2019 as the Sino-American trade war rumble on, central bank stimulus is restarted, and Middle Eastern tensions rise. Quite a difference wouldn't you say?

The Blockchain 

The blockchain technology which underpins the coins is revolutionary and carries great potential for a wide range of business. It can track logistics from source to shelf, expose new areas of the world previously inaccessible to investors through tokenisation of assets and even maintain impossible to edit audit trails useful in business and government.

The darker side involves total anonymity of transactions which to the user may at first sound ideal, but it doesn't take long to realise that criminals will exploit this feature. Business requires we know who spent what, to who and when for the purposes of state tax systems and to minimise fraud, money laundering and criminal activity. Here is another major reason why a pure cryptocurrency could not be used as money without first opening the blockchain to scrutiny from auditors.  

Has Bitcoin Had Its Time?

Will Bitcoin prices ever recover? Who knows? What is clear is cryptocurrencies are here to stay as technology makes it easier and easier to leave cash at home and consumers lose faith in the international banking system. Near field communication (NFC) phones and watches make it easy to carry out debit card payments without your wallet so why not go a step further an introduce a global currency with low transaction fees and international acceptance. It is likely Bitcoin, Ethereum, Litecoin and the others will remain used as more mainstream outlets accept payment. Users will benefit in terms of privacy, security, speed of payment and costs.

Facebook have recently stepped in with Libra and following regulatory approval could see billions of its users adopt a brand-new currency. As people spend a lot of time on social media it would be far easier to use a native token then to have to go to your phone or laptop to log into internet banking to perform a transaction, worse still visit a bank! Governments may challenge with a state backed cryptocoin but uptake of one variant is somewhat inevitable, the question is which coin will dominate?   

Unconventional Risks

It is very easy to get caught up on the volatility rates of both gold and Bitcoin, but there are other issues that need to be considered. British legal tender gold coins are exempt from Capital Gains Tax (CGT) by law, but the situation around Bitcoin is a legal minefield. Tax authorities around the world have indicated that cryptocurrencies such as Bitcoin would be liable for CGT. There are also serious security concerns around cryptocurrencies; Bitcoin exchanges have been hacked with tens of millions of dollars’ worth of Bitcoin being stolen. On the other hand, physical gold cannot be hacked. Investors can choose what security measures they need for their gold to suit their needs.

After panning for Bitcoin prospectors may have made a profit only to find themselves entangled in the wrong side of the law and facing heavy tax bills. Many who have dabbled in the digital world are simply unaware of their responsibilities. 

Storage

Initially the storing of Bitcoin appears the easiest when compared to gold as there is no physical footprint, there is no need for a safe at home or any need to pay for vaulted storage. However, these "coins" still need to be stored and there are a number of ways to do this.

1. You can open a "wallet" on an exchange, but these are susceptible to corruption and hacking, putting your entire investment at risk. If your investment does go down the drain you are in a precarious position as there are no regulations or consumer protection laws in the digital wild west! 
2. You can opt for a "paper wallet" where your coins are stored in a cryptographic key you print out and keep safe. Ironically you might need a home safe to do this as if you lose your printout, your investment goes too.
3. You can opt for "digital wallets" where keys are generated on a usb pen, but these cost upwards of £70 and as with paper wallets lose this USB, lose your entire investment. 

Gold is harder to lose in this regard and if you are not tech savvy or familiar with digital security measures holding a physical asset may be the right choice for you.

Wise Choices

To fully advocate one asset over the other strikes us as a bit amateurish as it depends on how an individual wishes to invest their wealth. A diverse portfolio might have a mixture of safe haven assets and risky assets, so it should not be a question of choosing one over the other! Precious metals and cryptocurrencies both offer very different investment opportunities and if you were one of the lucky ones to spot Bitcoin's potential a decade ago, you may be sitting on a very handsome profit. Don't be a lemming and buy when prices are sky high but instead sniff out investments which are under-priced and get in there early.  

If you are reading about investments in the mainstream media, you are likely too late as prices will already have climbed. We certainly believe precious metals of any sort would make a wise addition to any asset portfolio. We don’t just say this, we practice it every week buying and selling hundreds of thousands of pounds worth of precious metal. We monitor sterling for local opportunities and review the gold to silver ratio which can assist us in making large silver purchases hedging high gold prices. We would certainly be holding Bitcoin if we had bought it in 2010 but we do not buy into the hype that kept journalists busy for most of 2017 and 2018.  A famous saying by Baron Rothschild goes “buy when there is blood on the streets” so we wait for further price demolition before we take the step into cryptocurrency.