| – Gold versus bitcoin debate makes further headlines as tech experts weigh in – Peter Thiel tells Saudi conference he believes bitcoin is underestimated and compares to gold – Steve Wozniak tells Money 20/20 that bitcoin is a better standard of value than gold and U.S. dollar -Both men recognise that the US dollar has little value and there are worthy competitors to its crown as reserve currency – Gold continues to hold its value and has multiple uses, bitcoin remains volatile and difficult to use – Experts are pushing an unnecessary debate as gold and bitcoin state more about fiat than each other |
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| Lords of the tech world Peter Thiel and Steve Wozniak are the latest to add fuel to the bitcoin versus gold debate.
At separate conferences both told audiences that they had great hopes for bitcoin, comparing it to gold. The co-founder of Paypal and the Apple co-founder both expressed views that suggest they believe the world’s biggest cryptocurrency is superior to the world’s oldest form of money. Each of their comments demonstrated some ignorance when it came to how gold operates and also in how they believe the two assets need to be considered competitors. Their comments were really about the badly managed US dollar and how its time is limited. Yet as we have seen throughout the year, thoughts by experts return to bitcoin replacing gold rather than being a statement on the pushback against fiat money tyranny. Misinformed with misdirection |
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At first Thiel’s comments were relatively positive towards gold and he showed that he understood why investors choose to invest in both assets:
But Thiel also believes it has more potential than gold due to a misinformed belief about mining differences: So bitcoin is also, it’s mineable, like gold it’s hard to mine, it’s actually harder to mine than gold and so in that sense it’s more constrained,” Wozniak also had some interesting comments on how bitcoin and gold mining compared to one another:
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| Wozniak then described the US dollar as “kind of phony,” while describing Bitcoin as more “genuine and real.”
All about the dollar |
US Dollar Currency in Circulation, 1971 - 2009(see more posts on #USD, ) - Click to enlarge |
| To cut to the chase what Wozniak and Thiel are really saying is not that bitcoin and gold are competing with one another but instead that they are better than the US dollar.
This should be the main takeaway – the US dollar does have major problems. It has lost over 90% of its value, is controlled by one central bank and holds a huge amount of power over the rest of the world. Things are so bad with the US dollar that the likes of Russia and China no longer want to hold it in reserve and are rapidly increasing their exposure to physical gold bullion. This is where the crux of any debate should be, why is bitcoin so successful and can it follow in gold’s footsteps when it comes to holding its value and outperforming fiat currencies. The two assets are so dramatically different that there should be little airtime given to an either/or debate. Instead finance and tech commentators should recognise that if managed successfully bitcoin could join gold in its role as an alternative and powerful currency that operates outside of centralised markets and the clutches of central banks. Bitcoin versus gold is an unnecessary debate that distracts from the main issue: both history and new technology are now offering investors and savers great opportunities to save and spend outside of the fiat system. Forced to choose for no reason What is fascinating about comments made by the likes of Thiel and Wozniak is that they force investors to believe an unnecessary choice is necessary. Why do investors have to choose between gold and bitcoin? It’s like saying you must choose between gold and silver or Apple and Amazon stock, there’s no need. You can invest in both. Thiel and Wozniak’s comments do not add anything interesting to the discussion about the opportunities and risks of investing in bitcoin. Instead they merely add fuel to the headlines that ask if cryptos are ‘killing gold’ or if bitcoin is gold 2.0. This line of thinking has been particularly popular this year as bitcoin has surged over $6000 whilst gold has climbed by 10%. There is no doubt that bitcoin has energised investors, especially those in the tech space and younger generations. But because one asset is outperforming the other, does this make them substitute assets or should we consider them complementary? Gold and bitcoin: Substitutes or complementary? |
Gold and Bitcoin Price, Dec 2016 - Sep 2017(see more posts on Bitcoin, gold price, ) - Click to enlarge |
| -Both are clearly seen as safe havens: Take gold’s reaction when events such as North Korean sabre-rattling happen, or bitcoin’s reaction to the Catalonia crisis.
– Both are decentralised: Neither asset relies on a central bank to manage supply, demand or price. – Both have limited supply: Gold and bitcoin are mined. Gold relies on physical mining, bitcoin is mined mathematically. The above three reasons show there are clear similarities between the two assets. They are also the main reasons why people choose to invest in gold and/or bitcoin. But differences do remain, making bitcoin and gold ideal complementary assets whilst showing the precious metal to be the ultimate safe haven against fiat tyranny. – Gold is held by central banks, bitcoin is not. Currently the majority of central banks hold gold as part of their reserves. The most recent example is Russia who added 1.1 million ounces to reserves last month in an ongoing diversification from USD. So far there is no evidence of central bank investment into bitcoin, suggesting that they do not have an interest in supporting its role in the economy. – Gold is a highly liquid market. According to the LBMA some £13.8 billion worth of physical gold are traded just in London alone. Despite the huge influx of investment into both the bitcoin and blockchain arena there is still some way for the cryptocurrency market to go before it reaches the level of liquidity we see in the precious metals’ space. – Bitcoin does have enormous potential as a medium of exchange. Currently it is mainly bought by traders looking to bet on price movements. Very little of the daily support behind the price is thanks to it being used in transactions. The beauty of gold is that it has multiple uses. No longer is it used in minor hand-to-hand transactions to the extent we would have seen last century but it used in international trade agreements as well as in other areas such as medicine, technology and jewellery. – This leads on to the final and very, very important point: gold does not rely on electricity in order to be traded. It is a physical asset, unlike bitcoin. In Puerto Rico 95% of citizens are without electricity. If the entire monetary system were based on an electronic form of cash, such as bitcoin, this would cause multiple problems for those in disaster struck areas, or even places where electricity just isn’t as reliable. Gold bars or coins do not rely on electricity in order to be used in exchange for cash or goods. |
South Africa Gold, 1960 - 2016(see more posts on Gold, ) Source: US Funds - Click to enlarge |
Conclusion
Much of this debate fails to look at gold’s USP that has allowed it to survive as an asset and form of money for millennia: its ability to hold its value.
Bitcoin may well retain its value, but for something that has climbed 6,000% in less than a decade, without much evidence of its key selling points the jury should perhaps step outside for a bit longer.
This does not mean that bitcoin does not have potential. There are clearly some returns to be made. If the likes of tech billionaires such as Thiel, Wozniak and Musk are getting involved then there could be some interesting developments on the horizon.
However, discovery of an asset that is posting incredible returns does not mean sensible investing needs to go out the window. Consider the approach of Frank Holmes, CEO of San Antonio-based US Global Investors, which has $2.6 billion in assets under management and is one of the definitive top precious metals funds.
Holmes has recently backed and become chairman for HIVE, a gold-miner-turned-bitcoin-miner. Holmes is still a big investor in gold but sees the complementary potential for bitcoin. As anyone should approach investing, Holmes is diversifying his portfolio.
This brings us back to our main point, the debate is not about bitcoin versus gold but instead about investors and savers protecting themselves from the rapid devaluation of fiat currencies.
Bitcoin is new and volatile, with much to prove. Gold has been in existence as money and a store of value for millennia, not to mention all of it’s other roles.
Investors should continue to pay attention to the bitcoin chatter due to the narrative it offers around changing attitudes to money and the economy. However, they must remember that the debate is about security of savings and value. This is where gold is currently the only real contender for protecting your diversified portfolio.
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