Bitcoin Is a Replacement for Gold? Not So Much

A recent video ad produced by a digital currency asset company titled “Drop Gold” created some waves on social media last week. The ad encourages investors to drop gold from their portfolios and replace it with digital currencies such as Bitcoin. “In a digital world, gold shouldn’t weigh down your portfolio,” the ad proclaims.

But is Bitcoin really a replacement for gold? While the Drop Gold ad may seem clever and cute, cryptocurrencies aren’t a replacement for gold.

The most obviously ludicrous claim made by the ad is that gold has “no utility.” This reminds me of CNBC commentator Jim Leventhal saying that gold as “no use as a metal” a few months ago. In fact, gold has a wide range of uses from making jewelry to high-tech applications. That’s one characteristic that makes gold ideal as money. While the price of gold has fluctuated, it’s never been zero. And it never will be. Gold has intrinsic value due to its utility.

In a tweet, Peter Schiff noted the irony of the ad.

The ultimate irony in the #DropGold campaign is that you can’t mine Bitcoin without using #gold. This is just one of the many utilities of gold that Bitcoin promoters deny exist. But while they overlook gold’s obvious utility, they ascribe utility to Bitcoin where none exists!”

To say gold has no utility and Bitcoin does is simply a ridiculous assertion.

A World Gold Council points out a number of other factors working in gold’s favor as an investment, arguing convincingly that cryptocurrencies are no replacement for gold.

Gold

• is less volatile
• has a more liquid market
• trades in an established regulatory framework
• has a well-understood role in an investment portfolio
• has little overlap with cryptocurrencies on many sources of demand and supply
• is a safe-haven investment.

The WGC notes that the gold market trades at $150 billion a day, almost 100 times that of Bitcoin, and gold pricing remains consistent across exchanges in all forms.

The WGC also addresses the “utility” of gold, pointing out that its demand is diverse, coming from jewelry, investment, technology and central banks.

Cryptocurrency demand is highly speculative or investment related, as there is little proof of its use as a medium of exchange.”

Gold has a track record dating back to around 600 BC. Bitcoin has only existed for 10 years.

There is also the issue of supply. While the supply of a given cryptocurrency is constrained, nothing can prevent a new cryptocurrency from being launched, devaluing those already in existence. As Peter put it:

Scarcity is not enough. There must also be real value. The is also an infinite supply of cryptocurrencies. So they are not really scarce at all.”

As the WGC notes, cryptocurrency has had some remarkable periods of performance but has also seen massive haircuts during some periods and has failed during periods when it should have thrived. For instance, it failed as a hedge as the markets tanked in 2018, behaving more like a risk asset. It was down on par with tech stocks, falling 55% in the fourth quarter along with the stock market. Meanwhile, gold was up significantly in the same period.

While Bitcoin and other cryptos may have some appeal for some investors, it is clearly not a replacement for precious metals.

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