Why We Believe That Bitcoin Is The Future Of Gold

Bitcoin and other cryptocurrency investors have enjoyed an outstanding skyrocketing, yet there have always been (and probably will be) some sceptics. 

In 2017, as chair of the Federal Reserve, Janet Yellen claimed that Bitcoin was a “highly speculative asset” and “not a stable store of value”. Those negative remarks were cited by many other public officials at the time. Since then, though, the market value of Bitcoin has practically doubled. Cryptocurrencies are here and they are not going anywhere.

Comedian John Oliver has once described Bitcoin as “everything you don’t understand about money combined with everything you don’t understand about computers”. The technology aspects, specifically the blockchain network of digital ledgers which are used to record transactions, haven’t really lived up to their first hype, but are still beginning to make some progress. The issuance of $20 billion in “initial coin offerings” seemed to involve elements of a speculative bubble, but the funds raised are now being used to launch projects mostly similar to other IT ventures in Silicon Valley.

However, defiance to digital currencies as payments and transfer vehicles still seems to remain. Partly because of steep costs of transactions, Bitcoin is not widely used for payments, and its future role looks limited.

Institutes in the U.S. have been working on new regulations to increase transparency in Bitcoin transfers and reduce the scope for money laundering. Ms Yellen, together with the Fed, is likely to adopt an even more traditional approach, treating the payments system as a quintessential public good.

The Fed is working together with foreign counterparts in inspecting the development of central bank digital currencies. It is almost certain that CBDCs will eventually be issued in the bigger jurisdictions, just as in China. However, they will be denominated in national currencies, not crypto.

All the private competitors denominated in new currencies, such as Bitcoin, will be highly regulated or actively discouraged. Hybrid stablecoins, like Facebook’s libra, that are attached to a single currency or other real assets might be more welcomed by central banks, in case they are easily transferable into traditional currencies. In addition, they may not be powered by blockchain. Each of the major central banks might develop its own distributed ledger system.

In spite all that, crypto is still an excellent investment vehicle and store of value. But could Bitcoin seriously challenge gold as a safe asset for the biggest investors? History, regulation and market volatility make that look unlikely, but it is slowly yet surely beginning to develop a more significant role. Many big hedge funds and some conventional asset managers have started using Bitcoin as a core hedge against inflation just like Paul Tudor Jones. When this may have seemed attractive when central banks were in effect creating money by buying up government debts last year, there are a few signs of inflation on the imminent horizon.

Yet Bitcoin prices have continued to rise, apparently enforced by a narrative that holds that a privately created asset, which in theory has a fixed supply and cannot be “printed” like the “legacy” fiat currencies.

By the end of 2019, gold stocks held above ground amounted to 198,000 tonnes with almost 57,000 tonnes of proven reserves below ground. This total stock would be valued at approximately $17 trillion in today’s prices. The latest market value of Bitcoin is just about $0.6 trillion – and Bitcoin bulls see this as a measure of how much higher its price could rise.

For us there seems little to no reason on monetary policy or financial stability grounds why there should be any hesitations about cryptocurrencies competing with gold as a store of value.

The crypto world is currently in a fever of short-term speculation. But if investors continue to buy into the contentious narrative that these private currencies are by some means safer than the ones controlled by the central banks, they could rise much higher in market value in coming years.

One thing is for sure – as a matter of finances, we are certainly living in a radical era. 

Kiara Sofia Smith

My current focus is blockchain technology and cryptocurrency. One could even call me a blockchain “enthusiast.” I have worked for almost a decade on several financial projects related to the stock market news, fundamental research and technical analysis for several blogs.

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