At the end of 2017, Bitcoin and many of its contemporary cryptocurrencies were all the rage. The price of the most famous cryptocurrency had risen beyond anybody’s comprehension and, at its highest point in December, approached $20,000 dollars per Bitcoin.
Since then, the market has cooled somewhat, and the price has dropped significantly since its peak on the 17th December. And since a lot of people in both the gold and crypto worlds are beginning to see Bitcoin as a genuine threat to gold, you’d think we’d take this as the perfect opportunity to call time on the crypto craze and tell you all that gold’s all the rage once again.
In fact, we think the truth is far more complicated and nuanced then much of the current commentary is giving it credit for.
Bitcoin and the gold price
As it happens, we don’t think Bitcoin and gold are competing in the same game at all. Investment opportunities are not a monolith – different commodities, currencies and assets attract different kinds of people for different kinds of reasons at different times. In many cases, the same people are attracted to different assets, but for different reasons. They don’t call it an investment ‘portfolio’ for nothing.
To prove our point, you need look no further than a simple comparison of the gold price and that of Bitcoin. Over the course of 2017, gold rose in value against Sterling by about 3 per cent. Over the same time period, Bitcoin rocketed in value from $997.75 on the 1st January to almost $20,000 at its highest point in December, and $13,480.01 at the end of the year. That’s a price increase of about 740 per cent.
The enormous disparity between the price inflation of gold and Bitcoin proves that there’s no competition. Because if there was, Bitcoin would have already won.
Investors don’t tend to add gold to their portfolio because they expect it to inflate by hundreds of per cent over any standard 12 month period. Gold is considered a ‘safe haven’ asset – which means it rises slowly and reliably in periods of relative economic security, and holds its value against the tumbling value of almost every other asset in economic crises.
Look at a gold price chart: the biggest spikes come during the high-inflation period of the 1970s, the economic crisis of 2008 and the economic uncertainty that followed the 2016 Brexit referendum. In short, nobody’s buying gold because they think they’re going to make 700+ per cent returns over the next year – they’re securing a steady contingent of wealth as a hedge against future uncertainty, in the knowledge that it is expected to perform well when all their other assets look set to tumble.
Bitcoin on the other hand, a new commodity with new rules, can only be described as ‘uncertain’. That undoubtedly comes with its own benefits, but it’s highly unlikely that anybody’s looking to Bitcoin as a safe investment for years to come when it’s impossible even to predict the price next week.
Volatility and value
Bitcoin is unarguably a more volatile commodity than gold. And until everyone works out what its rules are, it’s likely to remain that way. The interesting thing about Bitcoin is how convinced many people are that the whole revolution is over simply because it’s dipped in price somewhat. To say that Bitcoin has lost its potential since the 17th December would be to assume that the December price is the default setting, and everything since then is a disappointment.
In fact, Bitcoin is still traded at a higher price than it was for most of 2017, and indeed much of its life to date. With no context and little mainstream history to compare against, we can’t make any assumptions about the future market repercussions of the latest price drop. The price is, quite simply, just lower than it was a few months ago.
But of course, this case study hits right into the heart of what makes Bitcoin attractive. The price could well shoot up over the next week to twice the price it hit in December, or could tumble back beneath $1,000. Nobody knows for sure what’s going to happen.
In fact, the volatility of Bitcoin is so notable that over a five month period between September and January, it traded at rates about eight times more volatile than those of gold. Taking the standard deviation of daily trading prices as a measure of volatility (the closer to 0, the less volatile), gold recorded 0.00703 and Bitcoin 0.05878.
The crux of all this comparison of dense figures and statistics is that gold and Bitcoin are of investment interest for different reasons. A volatile commodity is a riskier investment – it’s more like betting on the money you invested rather than securing it.
Which brings us right back to the crux of the discussion: at the heart of all good investment strategies is a diverse investment portfolio. Most people who buy gold do so as part of a range of different investments, all designed to perform differently in different economic situations. There’s no reason Bitcoin can’t be one of these. Assuming they’re in competition misses a fairly significant trick.
A gold and crypto-collaboration
As it happens, the respective benefits of gold and cryptocurrencies are so diverse, that some have found ways to combine the two. Recently, cryptocurrencies like XGold and Goldcrypto have been designed. These peg their value to the gold price, hoping to get the best of a decentralised, blockchain-powered currency, combined with the security and long term stability of gold.
For centuries, and through almost every major financial revolution in human history, gold has shown a remarkable ability to hold its value. Bitcoin and its contemporary cryptocurrencies may well be revolutionary – and we certainly look forward to seeing where they’re going – but we don’t think that they signal the end of gold any time soon.
In fact, we think gold and cryptocurrencies are set to continue to play their parts in numerous successful investment portfolios in the future and they truly have the potential to create some very interesting innovations, both independently and together.
If you agree with our diagnosis, perhaps you want to consider combining your Bitcoin bets with some good old fashioned gold security. Have a look through our selection of gold bars and gold coins if you want to find out more about your investment options.