Investments

Gold may no longer be yellow


Alain E. Roch, MBA

President and CEO

Alain.Roch@bluebridge.caIn just the past two weeks, Bitcoin rallied above US$40,000 for the first time in its history and then plunged, highlighting its highly volatile and speculative nature.

 

Bitcoin’s recent surge began in late October, when PayPal, the online payment behemoth, launched a service that enables users to buy, hold and sell cryptocurrency. While this is not a paradigm shift, it reflects the acceleration of a strong trend.

Analysts at JPMorgan Chase, who had previously been roundly criticized, recently concluded that “he use of bitcoin by traditional investors is just beginning”, comparing the digital and decentralized currency to gold.

Digital gold vs. physical gold

While many media outlets use a gold coin with a double-barred letter B to represent a Bitcoin, this cryptocurrency, and others, are virtual by definition. They’re nothing more than lines of computer code.

In 2009, Bitcoin’s creators decided to limit its supply to 21 million units (Bitcoins). There will never be more. This led proponents to say that over time, if Bitcoin’s use is borne out, we’ll be fighting for a few units or fractions of units and that, therefore, Bitcoin’s price will take off. On the flip side, that also makes Bitcoin a deflationary currency, that is to say a currency that decreases in supply because its owners want to keep it. According to some experts, Bitcoin is a safe-haven investment, or store of value, much more than it is a payment method. Yet, unlike gold, cryptocurrencies can be used for both purposes.

It is generally believed that global supplies of gold and all other raw materials are finite. Once mines are depleted, we’ll be left with recycling. It is also known, however, that if when the price of gold rises, new and more costly mining techniques will be put in place. Gold might be mined in ocean floors or even on asteroids; the latter evidenced by the creation, in 2018, of the Luxembourg Space Agency (LSA), which aims to develop the commercial space sector, particularly asteroid mining.

Gold is used in the decorative arts and jewelry, as well as in industrial applications in the dental and electronics sectors, because it is highly resistant to corrosion and an excellent conductor of electricity. However, like Bitcoin, its main use remains accumulation reflecting a desire to keep one’s money outside the traditional economy.

While the founding document drafted by Bitcoin’s creators was intended to prevent things from spinning out of control financially, Bitcoin’s core audience obviously consists primarily of speculators, resulting in wild market swings.

By contrast, when everything is going downhill, gold is, and presumably always will be, a safe haven; demonstrating that it is independent and cannot be demonetized. It continues to be a form of precautionary savings.

However, if digital currency is used principally to purchase or pay for digital services at the moment, cryptocurrencies could be akin to a store of value at a time when confidence in fiat money is shaken. Like gold, cryptocurrencies benefits from the very accommodating policies of central banks as they step up efforts to offset the devastating effects of the COVID-19 pandemic, despite the risk of devaluing their currencies less attractive.

Current Bitcoin holders are generally under 35 years of age; these millennials will be tomorrow’s political and economic leaders and perhaps elevate cryptocurrencies to the mainstream.

Word to the wise…

 

Jean-François Faure, “Or et bitcoin : que la confrontation commence!”, lerevenu.com, December 2, 2018.

Max Yakubowski. “Is Bitcoin a Store of Value? Experts on BTC as Digital Gold”, on Cointelegraph, July 29, 2019.

“Le bitcoin pourrait faire concurrence à l’or estiment des analystes”, rtbf.be, November 8, 2020.

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By ALAIN E. ROCH, MBA

19/01/2021

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