After 25 years in the investment management business, I’ve seen a number of fooled investment strategies, tips, ideas and even gimmicks. By now, most of the hype on Bitcoin and other cryptocurrencies have faded and those people who got in late and hoped to get rich quick hopefully now realize there is not a magic pill or “Hail Mary” that will make up for lost time and money spent instead of saved for their futures.
I enjoyed a recent article by Motley Fool contributor, Sean Williams, about why Bitcoin is not gold. His edited article follows:
Cryptocurrency optimists view Bitcoin and blockchain technology as game-changers for how currency is transferred from one party to another — which is a big reason Bitcoin has been so successful thus far.
Bitcoin’s underlying blockchain is its decentralized ledger that works without needing traditional banking networks to process transactions. Most notably, blockchain offers the ability to transfer funds from one party to another considerably quicker than with current banking networks, especially in overseas transactions. Sending funds overseas may take moments to validate and settle with blockchain, whereas traditional banking networks may take up to five business days to settle.
Bitcoin, the world’s largest cryptocurrency by market cap, has drawn regular comparisons to gold, which is viewed as the go-to investment anytime fear shows up. This comparison takes shape based on a universal value placed on the commodities, and also with relative scarcity of each asset. Specifically, there’s a 21-million-coin limit on the number of bitcoin available, just as there’s a limit on the amount of gold that can be mined from our planet. Therefore, the assumption has been made that Bitcoin can act as a store of value much in the same way gold has for investors.
However, Bitcoin falls short of gold on at least three points:
- Digital vs. Physical: To start, gold has a tangible application, whereas bitcoin does not. Bitcoin exists only in digital code, and is not tangible. You can’t put it in your hand or do anything with it, aside from using it as a medium of exchange, or hoping that someone else comes along at a later date and pays more for it, per token, than you did. Gold is a physical asset that has some practical uses such as being a conductor in electronic equipment, as the primary metal in fine jewelry, and in cosmetic dental industry.
- False scarcity: When it comes to gold, what’s on the planet is all we get. Putting aside science fiction ideas of mining asteroids, what we have in the ground and have already mined is all the gold we’re ever going to get. That provides a true physical cap on gold, allowing investors to make a genuine case for scarcity.Meanwhile, Bitcoin’s 21-million-coin cap is based on agreed upon protocols. Admittedly, getting consensus to increase the coin limit would be very difficult — but it’s not impossible. We can’t wave a wand and make more gold appear out of thin air, but computer coders with the backing of the bitcoin community could do just that and create more bitcoin.
To add to this point, even without increasing the coin limit above 21 million, Bitcoin’s numerous hard forks essentially violate the idea of a token limit and scarcity. Bitcoin has had three instances where a disagreement between developers resulted in the creation of new cryptocurrencies, Bitcoin Cash, Bitcoin Gold, and Bitcoin Private. These actions topple the idea of true scarcity for Bitcoin.
- History: Gold has been used as a currency for more than 2,700 years and today, you can turn gold into cash with relative ease. It’s also a trusted asset held by central banks all over the globe. While you’re not likely to pay for your morning cup of coffee with gold dust, gold has been viewed as an accepted form of currency for a long time.However, Bitcoin doesn’t have that tenured history. There are no fundamental tethers that allow investors to make a reasonable determination about bitcoin’s value. I’ve always said that if Bitcoin dropped in half (which it has since the peak), we would look at each other and agree “well, that makes sense because there is no business, products, income or profit behind it”. Additionally, there are no governments holding Bitcoin in their vaults, as they do with gold.
For Sean, the bottom line is that gold and Bitcoin are nothing alike — and to think that Bitcoin will behave similarly to gold could prove to be a big mistake. Of course, at Total Wealth Planning, we do not advise clients to invest in gold because of many of these same reasons of not having a strong fundamental foundation to validate a true value and support future appreciation necessary for clients to meet their goals. To quantify the long term result of gold vs stocks, Wharton professor Jeremy Siegel’s data shows that $1 invested in gold in 1802 would have been worth about $3 at the end of 2016. That same dollar in the stock market would be worth over a million dollars!
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