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Crypto is no gold

‘Bitcoin is merely a promise without any economic or fiscal backing.’
Cryptocurrencies compete more with fiat currencies than gold – but even in this they face challenges, says the author. Image: AdobeStock

Bitcoin and a slew of other cryptocurrencies are gaining traction as alternatives to fiat currencies as mediums of exchange. But could they also challenge gold as the ultimate store of value?

To my mind, there are so few similarities between gold and bitcoin that to compare them seems like a waste of time. Gold is easy to understand. We can see it, feel it, mould it. It has many uses and limited supply. Through the centuries we have accepted it as money and stored it in large quantities as national reserves. Bitcoin is new. It is complex. And it was created out of nothing.

But we should not dismiss bitcoin’s utility as a medium of exchange or a store of value without some (even rudimentary) research and analysis. We should also note that different people have different investment objectives, time horizons and risk budgets. So, there may be diverse conclusions as to its utility.

Let me offer mine.

Insurance policy

I like gold as a store of value in investment portfolios because it typically shines during times of financial stress. It acts as a safe-haven asset, with a proven track record of preserving and even improving value during market dislocations. It is an insurance policy against government economic mismanagement, which could lead to currency devaluation and rising borrowing costs.

In contrast, and despite its limited supply, bitcoin has failed as a store of value during times of financial market distress.

The extreme volatility of cryptocurrency prices (irrespective of market conditions) suggests demand is for speculative profiteering rather than safety of capital.

Moreover, major price falls tend to occur when lending dries up and bank collateral requirements rise meaningfully – forcing leveraged bitcoin speculators to sell. This tends to happen during times of market dislocation. Thus, while bitcoin’s limited supply might imply a store of value, its price history betrays this promise.

Nevertheless, cryptocurrencies could become an accepted (and legal) medium of exchange – one day challenging the dollar, euro, yen and other currencies as a means of payment. They therefore compete with fiat currencies more than with gold.

But even in this theatre they face challenges.

I have already shown that they lack credentials as good stores of value. They also exhibit great variability in demand while supply is artificially manipulated. Finally, cryptocurrencies are not widely accepted as a medium of exchange – only El Salvador recognises bitcoin as legal tender. This is because governments understandably want to collect taxes in their own currencies.

Bitcoin’s extreme price volatility means it fails the test as a currency with stable purchasing power and as a store of value akin to gold.

Bitcoin is merely a promise without any economic or fiscal backing. The potential for better cryptocurrencies (including central bank sponsored crypto coins called Central Bank Digital Currency) means the potential exists for bitcoin’s value to go to zero over time.

William Fraser is a portfolio manager at Foord Asset Management.

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Well explained, which the informed already know, but hey! why spoil a good story with the facts?

This bedtime story could even help everyone to enjoy their dreams in Technicolor..
Gold was once the unit of measure of all fiat value, but the fiat was the creation and victim of the fractional reserve lending system. This system preserved inherited elitism which was quietly maintained at the expense of the rest of society. As a result of the constant syphoning by the elites there was a constant need for more and more supply of replenishing fiat and thereby a need for more gold production to be placed into reserves to maintain the principle of a physical backing of the fiat. Then it all became too much to manage. Too great a demand for money to be printed but gold was now costing too much fiat to produce to enable the fixed price fiat backing as fiat lost its purchasing power. This was due to the over-printing syndrome, which was driven by greed and by the desire to spend fiat money that had not yet been earned in the economy (= greed). Nixon, just like the Romans, was unable to finance his wars due to this increasing gold price and decreasing fiat value problem (inflation). So, hey presto, the US dollar no longer needed cheap gold to back it and gold was set free to wander the universe. Furthermore, the US dollar was so revered that it did not require anything to back it, only faith, just like a deity. Accordingly the impact of excessive printing of fiat became a new and wondrous game of mutual confidence for the rich nations whilst it remained a completely different one for the rest, if any attempted to do the same. Then the elite arranged to be given the power to regulate themselves, which they used with reckless greed (what else), creating a systemic monetary crisis within the participating rich nations. The solution was for the mutual cartel members to sell more fiat to each other and themselves so as to keep the bond yields low. This ensured the affordability of keeping money cheap for the worthy. Listed companies could afford to buy back their shares whilst issuing more. This enables an accounting trick that produces apparent profits. The directors receive bonus and the share price increases. It’s the new normal game of wealth transfer. Unfortunately these are untested waters where the slightest bump (such as insane lockdowns) can result in any of an array of disastrous consequences. But it’s just a game to those that have secured their asset power, similar to snakes and ladders.
Enter the block chain and its related crypto currency. Here the door to bypass the systems of the elites is seemingly open to all. It exists under the nose of the elites who are apparently not sure about how much they can control and/or abuse it. But they try and see. If they choose to have it outlawed, poof and its gone. As such this is another wondrous game of confidence, similar to snakes and ladders.
Gold cannot go poof so easily, physical ownership just pokes the totalitarian brigade in the eye. As an elite totalitarian wannabe, first you need to buy and control all there is, and then every present and future source of production. Trying to do this can cause the price to go very high.

…. which led to the wonder world fantasy of derivative slice ‘n dice trading where billions can be made on the speed of you internet connection across the Atlantic ocean, now being expressed in cryptocurrencies.

Pres. Nixon could have sliced and diced gold but as you explain, that would still have blocked the happily pounding printing presses and now they are obsolete, being replaced by the transfer of billions of dollars with the tap of a computer key.

The “Golden Rule” used to be: If you’ve got the gold you make the rule, but now it’s if you’ve got the competing power you control the world.

ooops … that should be “if you’ve got the computing power” …

I am a proponent for free banking and free money, as opposed to a government monopoly on money and central planning of the cost and supply of money by means of reserve banks’ centralized control over the banking system. The market, through supply and demand, and not politicians, should determine the cost of money and credit.

That being said, we are currently in a fiat monetary system where a central planning authority, called a Central Bank, determines the price of money and credit and controls the state’s monopoly to issue currency. They won’t give up this privilege simply because some people like the idea of internet money.

Anything can serve as money. At the price of $70 000 per kg, rhino horn is more valuable than gold, diamonds, or cocaine. At the moment, rhino horn is the ultimate store of wealth, a unit of account, and means of exchange……. for international smugglers. Rhino horn is a currency that attracts no taxes, commissions, custodian fees, management fees, FICA requirements, or KYC procedures. Rhino horn is the ultimate form of money, except that it is illegal, and that is my point.

Gold has intrinsic value and keeps that value in terms of purchasing power, simply because, to produce gold, someone has to risk his life by going thousands of meters down a mineshaft. The value of gold is backed by the value of human life. Fiat currencies can be printed at the push of a button and no crypto miner risks his life in the process.

If fiat currencies had any intrinsic value, there would be no need for legal tender laws. Fiat money is accepted as money only because the law forces people to do so. This is why people who operate outside of the law prefer rhino horns.
The same law won’t allow crypto to be used as currency on a meaningful scale.

Ah, things only have value because someone risked their life for it. The logic.

Gold has far less intrinsic value than its nominal value. It simply is not worth using in most cases. Most gold is simply hidden away as soon as it is processed. The industrial market only absorbs a tiny fraction of its production at current prices. If push comes to shove, industrial use will decrease further. It only has value because people say it does. Liek everything else. Strange how the gold bugs never think their own arguments to their logical conclusions. Sure it is better than paper, but really, keep it in perspective. Shiny stuff attracts girls and the naive.

FYI, gold mining in the first world is less risky than being a nursery school teacher. Is that gold now cheaper? Plaas logik

Very well said.

With the exception of Bitcoin which I view as a piece of art, all other crypto currencies have operational teams, shareholders and are therefore breaking the laws of Fiat as they are operating as central bankers.

I would not surprise when the authorities start to clamp down on crypto currencies and that would end up deeming there value as Zero.

In time me thinks Bitcoin and a New Form of IMF Currency will created to off set and prevent over indebtedness from occurring as we have seen, central banks world over are simply trying to print away their problems yet no body is changing their behaviour. All currencies will therefore derive their value from the new IMF Currency.

The laws of fiat because they have developer teams. Lol. Really lol

Gold has a value because it is relatively expensive to generate. It has no intrinsic value at all. Imagine a shower of gold-rich meteors come over and shower us with ore that drops production cost of gold to $100 an ounce. All the gold ever produced crashes in value.

Contrast fake value (gold and crypto) with real value (income producing assets like companies and property). Property value changes in line with the quality of the income stream. Bang goes the neighborhood, bang goes rental demand, bang goes property value. Nokia was valuable until it no longer had a probable income stream. Neither hold nor crypto has any income stream and simply rely on the bigger fool theory

and definitely not an investment instrument.

Nothing has intrinsic value, things only have the value we ascribe to them.

Disagree: a tree that will produce 1000 kg of apples for the next 10 years the tree has intrinsic value. An ounce of gold is only worth what somebody else will pay for it in the future

Anything can be a store of value, land, livestock, art, gold and even digital currencies. Any of the above can be stolen, confiscated or deemed valueless by the market so there is nothing that is without risk, even gold or land, as they can be confiscated.
I don’t think crypto is a panacea, as it has too many flaws, and at less than a decade old, I think it has any ‘store of value’ credibility yet.
I dabble in crypto by mining, so I make a few dollars a month using spare computer time, but I am not ready to pay actual money for crypto. I rather mine crypto and change to actual money, and from there into physical assets.

Interesting Dog, thank you, but may I ask some questions please:

1. Who is paying you for the mined Bitcoin and is the price set at spot value?

2. Are you able to nominate the currency you would like to receive in exchange?

3. Once mined are you able to hold, and let go when you want?

Still trying to get my head around the bigger picture here, thanks.

Editor please correct the picture on this article. Why do people keep depicting bitcoin and other “currencies” as nice shiny gold coins? A white background with some black numbers across it, more appropriate but obviously also less attractive… There’s nothing like an actual solid gold coin. Give me Scrooge McDuck’s money vault any day 😉

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Like deonob, I’d also like to have Bitcoin depicted in the picture (or rather digital artwork).

That physical BTC coin surely looks like it could weigh more than a 1oz Krugerrand! And I thought crypto was “virtual” and there it is depicted as physical gold coin.

I’d take those physical Bitcoins clinging in a bag, and melt them all up to create a Golden Gun , or sell it to a goldsmith…

The next promising new crypto will rise & bump BTC or ETH off the centre stage, like the newest kid on the block. Gold will remain.

Bitcoin isn’t gold but there are many striking similarities which cannot be argued with. However, the differences between gold and BTC is what sets BTC apart from gold…and of course its not easier to understand than gold which you can see and touch.

BTC works much different, but then times have moved on as well and the world isn’t operating on the gold-standard either (like in 1910!).
The reality is that the fundamentals of money and blockchains have to be understood first before an opinion on the validity of BTC as a store of value can be grasped. To understand this “differentness” necessitate a large investment of focussed time and effort….which very few investment advisors and portfolio managers have done.

Consequently, instead of leading/advising investors on how to safely get involved in the crypto industry, they advise against it.
We’ve seen hundreds of millions lost in crypto scams because people aren’t getting the right advise and often make their own ill-informed decisions based on sentiment and hear say.

I’m a big fan of Cathie Wood and her team which does the hard work and identifying investible assets (which include BTC) and present it as ‘safe’ investable options in the tech space. Readers might want to google a couple of her video’s on this topic…

A cliche I’ve heard from so many advisors and portfolio managers: “It’s not timing the market – it’s time in the market which counts!”
BTC has now been with us for 10years. Even through all the major ups and downs it has provided returns which no other investment has returned ever before.

The future holds many uncertainties, including the price of BTC, but to wipe BTC and some other promising Crypto projects of the table would be short sighted.

This is not about gold, silver, fiat, crypto or whatever has true value or not or the means of transacting so many are in favour of, biased towards debating about… etc, etc, etc. It’s about what the globalists, the elites want and are planning to bring about. They call the shots, whatever future means they will implement for transacting, especially if it’s going to increase their wealth, power and control, their overall monopoly or stranglehold over world resources and society, they going to make it happen. It’s what the globalists want. And going full digital is the most effective way to get what they want, i.e.,full control, through programmable cryptocurrency. Whether crypto has value in the traditional sense or not is irrelevant, it’s what the globalist believe what the thing can do for them, and that is giving them the chance to use the capability of the technology to fully monitor, track, follow people’s economic activity, data that can give those who are in possession of such info tremendous power over the individual, which is what they want, already as an example, China and its E-Yuan cryptocurrency. The fact that the race is on by many other countries to develop their own central bank crypto currencies using blockchain and cryptocurrency technology shows that they know the power of the technology to give them what they want – power to control. The way things are panning out it looks more and more like we are heading full steam ahead into full digital domination, by design. That is the direction that the global powers that be are steering everyone into. And there is nothing anyone can do about it considering the power and resources at their disposal. Now, understanding what is unfolding, the wisest thing to do is to capitalize on the opportunities that come with the change the elites are pushing forward with. Perceiving and understanding what’s happening at a macro level and the bigger scheme of things unfolding is vital to preserve one’s wealth or to increase it, even though it might seem absurd to traditional commonsense. The elites are pushing ahead with virtual currencies, and people people better get on this train with at least a percentage of their portfolio. If they don’t, continuing to stick their heads in the sand, stubborn in their mindset of the past, it’s not going to play out well for them, with the possibility of virtually losing everything when the final flip happens from the old into the new. These things happen as a trickle, and a trickle, then it comes as a flood, by then for most too late to act. I’ve been watching the crypto, digital, virtual space for years and by the looks of things it ain’t going away, it’s getting larger and larger, and LARGER EXPONENTIALLY. There has got to be something seriously wrong with one’s mind not to perceive what is unfolding here.

I’d rather have physical gold than own electrons on a keyboard somewhere in the sky

In two days time it is 50 years since the Nixon shock.
Do yourself a favour and visit the site wtfhappenedin1971.com

The writer says :”Bitcoin is merely a promise without any economic or fiscal backing.”

Well the dollar is not backed by gold anymore, and the supply of dollars are increasing at a rate not seen before.

Bitcoin is only ever going to be 21 million.

Sunday is the 50 year anniversary of the Nixon shock.

The beginning of the fiat era.

I suggest having a look at http://www.wtfhappenedin1971.com for some interesting information. Society has not been the same since.

“Bitcoin is merely a promise without any economic or fiscal backing.”

– well the dollar is backed by only the promise of politicians and central bankers. And the supply has increased at a rate never seen before.

Bitcoin is backed by code. Truth. Decentralised.
And there will only ever be 21 million.

You decide.

Johan Buys, Aonk, PurgeCoin and others, do yourselves a favour and learn about Crypto-assets, BTC and Distributed Ledge Technology. It is clear for everybody with a bit of insight that you are shooting from the hip and, in doing so reduce the value of the debate, which should not just be about “for-and-against”. It almost seems like the stupid, time-wasting vaxxer/anti-vaxxer debate, it never ends and the more they argue and fight, the larger the gap becomes. There are simply NO winners.
Read Blockchain Revolution despite it being 10 years old – it is not rocket science. I recently did an online course via UCT’s Getsmarter-programme (I am sure there are many others), that being the reason why it is so easy to spot the hip-shooters on this forum.

Don’t spoil a good story with the facts …

End of comments.

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