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Is bitcoin the new gold?

Could the famous new ‘currency’ replace the world’s most traded material?
The increase in its value is now being driven by institutional investors. Chris Ratcliffe, Bloomberg

Bitcoin’s price has once again soared in recent months, as has the price of some of its other cryptocurrency peers such as Ethereum – making this very modern form of investing a very ‘hot’ topic at the moment.

The seemingly ever-increasing price of bitcoin leaves the world holding its breath once again, as we did at the end of 2017, waiting in anticipation for the apparent bubble to burst.

The volatility of bitcoin and other cryptocurrency prices continued to contradict weekly analysis and projections from the start of December last year. Bitcoin has broken through several thresholds and psychological barriers, reaching a new record high of over $41 000 (R617 717). What was interesting is that bitcoin, and other cryptocurrencies, were not nearly as topical as they were when it set its previous record high of $19 500 at the end of 2017.

This has naturally raised the question as to why there was such a significant increase in the price of cryptocurrencies, and who was responsible for it.

In response to the increased investment in cryptocurrencies, the Financial Sector Conduct Authority (FSCA) has also published a draft declaration on crypto assets as a financial product in terms of the Financial Advisory and Intermediary Services Act of 2002 for comment.

During 2017’s crypto boom, you could find a direct correlation between the price of bitcoin and the number of Google searches for bitcoin.

This caused us to believe that this bull run was mostly attributable to retail investors.

Obviously at the end of 2020, one would have expected to see the same trend, but something was different: there was a sudden increase in the bitcoin price sparked by an announcement that PayPal had decided to adopt the crypto asset in late October 2020.

This laid the foundation for what was to come. In December 2020, we witnessed yet another bull run, resulting in bitcoin becoming a $1 trillion market cap asset. However, this time the increase in its value was driven by institutional investors – the likes of Skybridge Capital and Mass Mutual – rather that retail investors.

Institutions’ reasons for investing in bitcoin vary, but they are often motivated by the need to manage their clients’ risk, and to hedge them against the devaluation of certain asset classes which include local and foreign fiat currencies. This is similar to the way that investors would invest in gold to hedge themselves against a devaluation of fiat currencies and other asset classes.

Pandemic-driven motivation

The Covid-19 pandemic has created an ‘almost perfect’ storm in which governments and central banks around the world are under pressure to put policies in place, and make certain controversial decisions to best manage their economy. But not everyone would agree with these decisions. This created a motive for investors and institutions to move their wealth away from regulated currencies and asset classes to a freer market.

Essentially, bitcoin has become the digital equivalent of gold – the two share several similar and advantageous characteristics.

Like gold, bitcoin is scarce, interchangeable and divisible – but it’s more durable and portable than gold, and is expected to be more broadly accepted.

Its limitation is that the cryptocurrency is not yet trusted to be a store of value to the same extent that the general public trusts gold.

That said, the mass adoption of bitcoin is growing.

Read: Musk says he’s a Bitcoin ‘supporter,’ buffeting price again

Gold has some industrial use, but it gets its value from others believing it has value –value therefore becomes reflexive in the same manner that people will believe gold or a fiat currency has intrinsic value if others believe it to also have value.

Once this inherent belief in something’s value is diminished, any ‘bubble’ associated with it is said to ‘burst’ or result in hyperinflation, which has been witnessed several times in recent history.

This exact same principle applies to bitcoin: once more people believe in bitcoin being a store of value due to its shared and improved characteristics to gold, it will ultimately lead to an increase in demand and an increase in its value. If that inherent belief disappears, the bubble will burst.

Price

Interesting views on where the bitcoin price is expected to end up continue to be a source of debate. The market cap of gold is currently trading at around $10 trillion, but there is only expected to be around 21 million bitcoin in circulation, according to its protocol.

As a result, the two are perhaps not quite equal – yet.

Based on the hypothetic replacement of gold by bitcoin the price of one bitcoin could be estimated to be around $470 000 (close to R7.1 million). This could be argued as an extremely optimistic view, but if bitcoin took only half of the market cap of gold, it would still end up at around $235 000. US-based bank JP Morgan recently said that bitcoin has the potential to reach $146 000 in the long term, as it competes with gold as an asset class.

Bitcoin has had several bubbles which seemed at first to burst and then rebound to reach even higher prices. If an investor had bought bitcoin at its famous peak in 2017, held onto it even though it had lost 80% of its value, that investor would have almost doubled their investment value, which shows that bitcoin is a long term investment and could be even more valuable in the future.

Whether investors make short term gains from the volatility of bitcoin or want to appreciate their capital from a long term investment perspective, it remains extremely important to understand one’s risks, diversify and make informed decisions.

Wiehann Olivier is a partner and digital assets lead at Mazars South Africa.

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NO – I think it belongs to the unregulated ”gangsters paradise”

To play around with that ”at your peril” !

I think this is old school thinking.

Gangsters/fraudsters used fiat money for centuries to execute evil. Internet can be of very good use, but can also be used in a very evil way. Cannabis can be used as a powerful medicine, but also as a powerful drug. Small amounts of wine can be good for your health, but someone under the influence can turn into a murderer.

So why then is crypto only bad? I own crypto and it did not change me into a gangster. It is busy freeing me up to be more financially independent, which will allow me to to more good work.

Oh Really – did you invest in MTI as well- oh sorry, I should have guessed – you did not?

Oh Really – did you invest in MTI as well – oh sorry, I should have guessed – you did not?

@comme ci comme ca
Why rope MTI in? How is that related? That is just a plain old Ponzi. Could rope Herbalife in also? I understand that you are probably over 65 and don’t understand technology very well, but that doesn’t mean it’s real

So you prefer the regulated gangster’s paradise? Central Banks that can print money as they please, without governments able to control them? As mentioned, very old school thinking, time to re-educate yourself

Wont call it gold just yet but it can no longer be ignored. Central banks have taken notice and many others also.

I think its here to stay and with time the volatility will reduce.

Nobody has 100% gold as a portfolio and nobody should have 100% crypto as a portfolio. Not even sure what sensible would be but I think maybe 5%. Take a bit out of your gold holdings and reduce cash a bit??

the idea that BTC is digital gold is absurd; it really is 90% religion, 5% tech and 5% finance. actual gold is tangible, pretty (to most), have useful qualities and is scarce; overvalued imho but gives people a sense of security in an uncertain world. what does BTC have other than the holders of BTC saying it is digital gold? and how do you accept that the vast majority of BTC is in the hands of a few whales? unless there’s some real-world use for BTC that will see large-scale adoption it must eventually go the same way as religion has in the developed world.

Great comment MOK. This thing is going to end in tears. If BTC is the new gold, how does it help you in a country like Russia, venezuela or China who simply disconnect the internet when they feel threatened? What happens when if Crypto starts to threaten dollar dominance and US Fed bans is use? How does BTC help you in a country like Zimbabwe where no-one accepts it as payment? I’ll hang to my gold thanks…outdated but proven.

Agreed … we may be fooled into thinking that online is sacrosanct but not in China or Iran or Russia. The definition of a global currency is just that – global, not only tradable in the connected First World.

And of course, the ancient Golden Rule is still valid: he who has the gold makes the rules.

If bitcoin develops to be the new gold then bitcoin faces a problem. Gold has been confiscated twice in the USA. Banks were forced to hand gold in private ownership over to the state. Gold is taxed as a commodity and the state takes taxes on transfers, brokerage and commissions. Gold trading is regulated and FSP’s have to comply with money laundering and tax legislation. If a Russian hacker is able to enter the secure system of the Pentagon, then how safe is a crypto-wallet?

The most important argument, however, is that bitcoin scarcity is a fallacy. When Tencent is too expensive, investors buy Naspers to get exposure to Tencent. With all the competition for bitcoin and the availability of alternatives, why buy expensive bitcoin if you can buy another stablecoin to get exposure to cryptocurrencies?

The value is determined by the backing really. What ultimately backs bitcoin and what ultimately backs gold? A person, a miner, has to risk his life to go underground to extract gold. Gold is backed by the value of human life. Does someone have to risk his life to mine bitcoin?

if bitcoin replaces gold it would mean there are twice as many fools out there as previously imagined.

Both have a future value = what somebody else will pay as neither generates ANYTHING of itself. Basically the same as collecting art or watches = speculation, hobby, fixation but certainly not investing.

Except that gold does have an inherent value that can drive its price up.

It required in high performance electronics. Most of the interface pins inside your computer e.g. CPU to motherboard, graphics card to motherboard, RAM to motherboard, are gold and you would like have a far less stable computer without it.

Sure, there is some industrial demand for gold but that annual demand is a very very small fraction of total above ground gold.

@Johan-Buys

You definitely have no clue on how BTC works…..

Enjoyable to read all your comments. My investment in bitcoin grew >300% last year. Call it fools gold, pyramid scheme, etc. It tripled. Full stop. Investment in Ethereum increased by more than 500%. And yet you all sit on the sideline critising. How much did your investments grew last year? Maybe 6-12%? Enjoy!

My ETH grew by 500% thank you very much. Not holding any BTC as per my argument above. BTC will probably grow more in 2021, but that’s not the point. Saw the same kind of bluster in 2017. The core question is whether BTC can inherently justify the value attributed to it. My answer is no.

@AP, I agree. They can call it what they want but since November 2020 when i bought EC10 i was able to survive covid financially. i still keep it as 4% of my portfolio. anything i lose now, i lose nothing because i cashed in handsomely. Again, call it, i took a chance, invested, speculated, whatever the ‘pro’s’ call it, bottom line is, i made serious money

Is this not how the world work? People don’t like change and will fight/resist it, even when it is good for us. I bought at 100% the incorrect time (peak of 2017) & made the typical mistake of selling and buying while it was falling and subsequently lost 70%. However, I bought again at lows, just more gradually and did not sell again other than swapping 50% BTC for ETH early last year. All in all more than doubled my initial investment. I still think it has massive upside, but will go through a few ups and downs in between.

People are salty because they were too blind to get in earlier, now they need to say negative things to make themselves feel better….

A sideline question. What future does gold have as an investment? Gold showed no growth between 1980 and 2000 and then excessive growth the last 20 years. Bitcoin is definitely some sort of competition to gold, for how long we dont know. In the context of massive money printing schemes recently, gold and btc are both solid options.

End of comments.

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