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Why bitcoin won’t replace gold: graphic




queen elizabeth ii gold vault
GOLD! Always believe in your soul..

Eddie Mulholland – WPA Pool/Getty

  • Is bitcoin “digital gold?”
  • Its proponents argue that the digital currency could
    replace gold one day as a major store of value for
  • But there are multiple criteria that gold fulfills but
    bitcoin falls flat on — meaning it won’t be replacing the
    precious metal any time soon.
  • Bitcoin is pretty illiquid, has little functional
    purpose, and there’s no guarantee it’ll still be used even a
    few years from now.

Bitcoin is the “digital gold” — at least, that’s what its fervent
advocates claim.

They argue that the buzzy digital currency is the 21st century’s
answer to precious metals, and may one day replace gold as a
major store of value for investors.

But is bitcoin likely to actually replace real gold in mainstream
investors’ eyes any time soon? According to Morningstar Equity
Research analyst Kristoffer Inton, the answer is a resounding no.

In a recent research note for investors, the analyst laid out
five criteria that gold, as a “safe-haven investment,” fulfills —
and that bitcoin and other cryptocurrencies would also need to
succeed at in order to be considered as an investment on a par
with (or superior to) the shiny precious metal.

Notably, these criteria don’t include volatility —
something investors want to avoid at all costs for safe-haven
investments. Bitcoin is, infamously, prone to extreme bouts of
volatility. In the space of under a year, its price has
skyrocketed from around $4,000 to almost $20,000, before falling
back to around $6,500 today.

So what are they? The five areas are liquidity,
functional purpose, scarcity of
, future demand certainty, and

Gold successfully ticks the box on every one of these criteria,
while bitcoin only manages two (at a push), Inton argues.

morningstar bitcoin goldMorningstar Equity Research

First up, liquidity. An investment vehicle needs
to be traded regularly, and bitcoin is remarkably illiquid, as
crypto investors hoard (or “hodl”) their digital coins. “Current
levels of trading see daily volume of roughly 0.5% of all
existing bitcoins,” Inton wrote. “Gold averages more than 5 times
as much volume, with nearly 3% of all existing gold being
regularly traded.”

Next: As well as being a universally recognised store of value,
gold actually has a functional purpose — from
its utilization in computer circuit boards to ornamental
jewellery and teeth replacements. Bitcoin’s only purpose is as a
currency and store of value — and right now, it’s only rarely
accepted for actual purchases (rather than speculative trades).

Bitcoin does, however, have scarcity of supply,
a necessary component for retaining value. There will only ever
be a maximum of 21 million bitcoins in existence, a rule written
into its code from day one.

Is there future demand certainty for bitcoin?
That’s a very big unknown. The digital currency has been around
for less than a decade, in a period of significant technological
and political upheaval; even if cryptocurrencies catch on in the
mainstream, there’s no guarantee bitcoin will be one of the
ultimate winners. In contrast, gold has been universally accepted
as valuable for more than 5,000 years of human history — it’s a
pretty safe bet for investors that it won’t have totally devalued
a year from now.

Lastly, there’s permanence — the question of
whether the given investment resource itself degrades over time.
Gold is a precious metal that doesn’t tarnish; bitcoin, too,
won’t rot or deteriorate. (Though if people stop widely using
bitcoin, the network will degrade in quality and could eventually
disappear altogether; gold would continue to exist even if it
ceased to be used as an investment vehicle tomorrow.)

“We think it’s unlikely that cryptocurrency will
meaningfully attract safe-haven investment dollars away from
gold,” Inton wrote. “For cryptocurrency to challenge gold’s
investment case, we think additional certainty surrounding
blockchain’s use, additional certainty around the popularity of
one cryptocurrency over another, and improved trading volume
will be needed.”

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