Is Bitcoin the New Gold? Goldman Doesn’t Think So
A recent note to clients authored by Goldman Sachs analysts, including Jeffrey Currie and Michael Hinds, emphasized the continuing importance of gold and silver to investors, saying precious metals remain a relevant asset class in modern portfolios. The report focused on precious metals’ durability and intrinsic value, noting they are neither a historic accident nor a relic, even with new assets such as cryptocurrencies emerging.
The use of precious metals is not a historical accident – they are still the best long-term store of value out of the known elements.”
The note also focused on Bitcoin, saying investors shouldn’t consider cryptocurrencies the “new gold.”
Gold wins out over cryptocurrencies in a majority of the key characteristics of money.”
As summarized by Bloomberg, the Goldman note emphasized that both uncertainty and wealth creation drive investment in gold.
Investors boost the amount of gold in their portfolio as uncertainty increases, making fear the key medium to short-run driver, Goldman said. Wealth is the long-term driver, especially in emerging markets such as China, where growing income levels over the next few decades will support prices, it said in a report.”
Bitcoin has seen phenomenal growth this year. The price of the cryptocurrency broke through the $6,000 level this month. A lot of people have made a lot of money on Bitcoin. But Goldman pointed to several fundamentals weaknesses it sees in cryptos that make gold a better long-term store of value.
- Cryptos remain vulnerable to hacking through the digital wallets where they’re store.
- Bitcoin is subject to significant regulatory risk. For instance, last month, China cracked down on Bitcoin exchanges and outlawed initial coin offerings.
- The supply of cryptocurrencies is unlimited. While a given crypto such as Bitcoin does have limits imposed on its creation and is subject to scarcity, there are over 1,000 different cryptocurrencies currently in existence. “It’s easy to create alternatives, meaning there’s effectively no control over supply at a macroeconomic level and no intrinsic value due to rarity.”
- Bitcoin is extremely volatile. Goldman said gold is clearly better at holding its purchasing power and has much lower daily volatility. The note pointed out Bitcoin’s volatility has averaged almost seven times that of gold so far this year.
- Transaction costs for Bitcoin are rising rapidly. As CNBC pointed out, the average transaction fee at its peak in mid-July was just below $9, according to bitinfocharts.com.
That’s not to say Bitcoin doesn’t have some significant advantages. After all, it is up over 400% this year. Meanwhile, gold has seen a price increase in the neighborhood of 10 to 12%. Cryptocurrencies also enjoy greater portability than precious metals. as Bloomberg noted.
Transferring bullion can be expensive, given its weight, need for a high level of security and high import taxes in some countries, such as India. In contrast, it’s much faster and cheaper to move bitcoins.”
Of course, as we pointed out last week, when it comes to gold vs. Bitcoin, investors don’t have to just pick one. After all, diversification is one of the fundamentals of investing. You would never put all your money in one stock, or one bond, or one commodity.
Buying gold and silver is a great way to diversify your cryptocurrency portfolio. You can even buy gold and silver with Bitcoin. In the world of investing, it’s never wise to put all of your eggs in one proverbial basket. Diversifying your cryptocurrency portfolio with precious metals can help mitigate some of the potential downsides and put you in an overall stronger financial position.
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