I shared my thoughts recently on why bitcoin is an abject failure as a currency. It’s too unstable and erratic, plus people need to know the pound in their pocket is going to be worth pretty much the same today, tomorrow, and next year.
On top of that, the US Justice Department has commenced criminal investigations into the possibility that traders might be manipulating the price of bitcoin and other cryptocurrencies. And we surely don’t need reminding of the punishments meted out to those banks that tried much more subtle manipulation in the Libor rate scandal of 2012.
The fact that bitcoin really doesn’t work like a currency is a conclusion that more and more commentators are reaching, as the intangible stuff keeps on gyrating in value. From trading at more than $19,000 per bitcoin at its peak, we’re looking at only around $7,500 today.Â
So why is the investment world moving towards seeing bitcoin as akin to gold? There are some striking similarities.
Firstly like gold, there’s a finite supply of bitcoin. In fact, the most that can ever exist is limited by its blockchain technology. And that technology, at least in theory, adds a layer of security. It allows bitcoins to be traced to their true owners in a way that gold rarely can — all gold is essentially the same, and it’s easy to melt down and remove any markings.
There’s also a ready market for bitcoin, and it can be bought and sold with relative ease. And not being a heavy physical thing, it’s easier to carry around and potentially harder for authorities to control — you can carry far more value in bitcoins on your phone that you can in gold coins in your pocket.
Not so good
But I think some of these similarities are superficial and not as attractive as they might at first seem.
Take the supply. Sure, there might only be a finite supply of bitcoin itself, but we’re already seeing many alternatives popping up to take advantage of cryptocurrency mania. Who knows where that will end? And that technology is partly restrained by today’s computing limits — and surely only a fool would expect that not to continue to advance dramatically.
The tangibility of gold is also, I reckon, actually a benefit. You can see it, touch it, weigh it. And unless you have access to some top-end nuclear technology, there’s not a lot you can do to destroy it — and that certainly can’t be said for bitcoin’s magnetic tweaks on a computer disc.
The physicality of gold doesn’t have to be a hindrance either. It’s easy enough to take certificated ownership of gold without ever seeing the metal, and trade it that way.
But the real hurdle in the way of bitcoin being seen as a gold substitute is tradition. Everyone understands gold and our species has been hoarding it for millennia — and you can put on a far more impressive bling display with gold than you can with bitcoin.
So no, the multitudes on Earth are not going to give up on gold and invest in bitcoin which, to my mind, remains a lousy and very risky investment.
So should you buy gold instead? I say no, because gold doesn’t create any new wealth. For that, you need part ownership in productive companies.