Is Bitcoin the New Gold?

In a research note last week, Goldman Sachs stated that Bitcoin could probably be the new gold.

And if that was not shocking enough...

It went on to predict that bitcoin has the potential to cross the US$100,000 mark in coming years.

That, by the way, is about 2.5x the current price of a Bitcoin.

No wonder that after a two-year break from dealing with cryptocurrencies, Goldman reopened its cryptocurrency desk in 2021.

Since then, it has been carefully monitoring the blockchain and its ability to use crypto as a hedge against inflation.

Goldman Sachs said...

• Bitcoin may have applications beyond simply a "store of value".

What does that mean?

A store of value means that an asset can maintain, or has the potential to maintain its worth, unaffected by time, or how long the market has been running.

Gold is a great example of store of value.

Goldman Sach's analysts estimates that the proportion of bitcoin in a portfolio will only increase with time.

If Bitcoin is able to claim a 50% share of the 'store of value' allocation, the price would pretty much exceed US$ 100,000.

Why Goldman Sachs would dip their toes into this debate at all...

The total market cap of Bitcoin is a little over US$ 700 bn. Gold is about US$ 2.6 tn.

This suggests that Bitcoin is already at over 25% of the total market for "store of value". Of course, we are assuming these are the only two options, and...both are a store of value.

But let's get back to the key point.

Does Bitcoin have the potential to replace gold?

In 2021, the price of Bitcoin jumped an overwhelming 60%.

Gold, on the other hand, fell 3.6%. It's worst performance since 2015.

That's quite a divergent performance.

Having said that, gold and Bitcoin share two traits...

#1 Both do not pay any interest or dividend if you hold them in their basic form.

#2 Since they are not infinitely reproducible, like paper money, they protect against that abuse.

We could have added a #3...both are a 'store of value' but that's still up for debate.

Now, moving to the differences between the two. Here are two that are top of mind...

#1 Gold has been around for thousands of years and is a proven store of value. Bitcoin, is comparatively, a new kid on the block and has no history to back it.

#2 Gold can be found in a natural physical state. Bitcoin is, well, just code.

If you pushed us to even the scale...we could add a #3. It's impossible for a layman to understand the workings of a Bitcoin. Gold on the other is a far easier conquest. ??

Is Bitcoin a Currency?

A few such as Nouriel Roubini, Professor of Economics at New York University's Stern School of Business have said that calling cryptocurrencies a currency is a misnomer.

On Bitcoin, Professor Roubini said,

• Currencies must have four qualities: they must be a unit of account, a means of payment, a stable store of value, and act as a single numeraire.
  
  Bitcoin and most other cryptocurrencies have none of these features. It's not a unit of account; nothing is priced in bitcoin.

Referring to the blockchains, Prof. Roubini also mentions that just because something is scarce, it doesn't mean that it has a fundamental value.

You now know which way he leans, when you read what he said in 2018...

Bitcoin is the "mother of all scams".

We wonder if his view has evolved since...

Bitcoin's relevance today

Analysts at Goldman Sachs claim that bitcoin should be considered a macro asset.

This is because it has "matured enough". This means that its behaviour now resembles that of other macro assets.

They also believe that bitcoin is going through a one-time social adoption phase. One that could make or break it in terms of returns.

Security and legal concerns

Most of the security and legal challenges around cryptocurrencies rely on the fact that blockchains are decentralised and largely anonymous.

This is why 'modern bank robbers' who hack a cryptocurrency exchange are able to steal millions in cryptocurrency.

The most recent instance of this took place on the crypto trading platform, Bitmart in December 2021. The exchange experienced a large-scale security breach where hackers made away with more than US$ 150 m in assets.

The anonymity doesn't help either.

Last year two South African brothers who founded a cryptocurrency investment platform called Africrpyt, disappeared with US$ 2.2 bn worth of bitcoin.

Keeping these factors in mind, the central bank of China declared that all cryptocurrency transactions are illegal and they seriously endanger the safety of people's assets.

Many of these concerns are not associated with gold. An asset it could supposedly replace.

Value and network

It is known that bitcoin has absolutely no value outside its 'blockchain'. It is fundamentally isolated and inaccessible in a physical sense.

However, gold does not require a network. The trade, possession, and acquisition of gold has been an age old custom.

If cryptocurrencies are to replace an asset like gold, their near future plans must include it being manifested physically in some way to prove it serves as a "store of value."

Undeniably, those on various blockchains have the ability to build apps and other products on the network in order to increase their value.

But again, the more they mingle with private data- like contacts, medical history, etc. the more they prove to be a threat to privacy.

Gold does not have these issues.

Lastly...

The wealthy investment classes alongside institutions have begun to acknowledge that digital assets are here to remain.

As they are still in their infancy, many more advancements in this field are yet to come.

But through all the highs or lows, dear reader, what do you think?

Is Bitcoin the new gold?

Equitymaster's take on cryptos

We don't get cryptos. Honest.

It's something that has caught our imagination but we just can't figure out a way to value it. Fundamentally speaking.

Chartists like our very own Brijesh, study prices and suggest various levels. That makes sense to us.

Having said that, our "fundamental" take on cryptos is simple...

It's in line with the approach anyone should have when dabbling in a space one does not understand.

Invest only what you can afford to lose. Nothing more.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...