The rise of gold and Bitcoin has opened up a heated debate about whether Bitcoin – a new digital currency that has existed for more than a decade – can replace gold – the traditional investment channel?
What is bitcoin?
Bitcoin is an anonymous individual called Satoshi Nakamoto, a crypto-monetary developed in 2009. Transactions are confidential and are not done without brokers or intermediaries. It’s a digital currency, you can’t physically use bitcoin. And it’s decentralized, meaning that no bank or government owns it.
Currently from Overstock.com to PayPal can be used anywhere and this list expands rapidly. Many people think that bitcoin is indeed a safe investment. This week, Bitcoin reached an all-time high of $49 000 this week. And this was definitely real.
How does bitcoin works?
Bitcoin (symbol: BTC, XBT, BitcoinSign.svg) is a cryptocurrency, which can be exchanged directly with an Internet-connected device without the need for an intermediary financial institution.
Bitcoin works differently from typical currencies: there is no central bank that governs it, and the system is based on a peer-to-peer network protocol on the Internet. Bitcoin supply is automatic, limited, divided according to a predetermined schedule based on algorithms.
Bitcoin is issued to computers that “mine” bitcoin to pay for verifying Bitcoin transactions and record them in a distributed ledger in the peer-to-peer network, via blockchain technology. This ledger uses bitcoin as the unit of account. Each bitcoin can be broken down into 100 million smaller units called a satoshi. Businesses tend to want to pay with bitcoin to minimize costs.
When the price has exploded
After hitting the bottom of the year at 1,470 USD / oz in mid-March, the world gold price increased strongly again and peaked at 2,060 USD / oz at the beginning of August 2020. It is the first time in the history of world gold price surpassing 2,000 USD / oz. From bottom to top, gold has risen more than 40% in less than 5 months. By the end of 2020, gold prices fell below $ 1,900 / oz but increase about 23% compared to less than $ 1,530 / oz when starting 2020.
Bitcoin price movements in 2020 and early 2021 could shock even the most optimistic investors. After starting the year at nearly $ 7,200, the virtual currency slipped below $ 5,000 around mid-March, then rose almost nonstop to $ 23,000.
Bitcoin established a new record high transaction price of virtual currency at 40,380 USD / dong on Jan 7st. Thus, over the past year, the value of Bitcoin has skyrocketed to 340%, and more individual investors and institutions consider the coin as a means of safekeeping in the context of inflation.
There are many reasons to invest in gold and Bitcoin in 2020, making these two assets the top “hottest” investment channels now. The first reason to mention is the Covid-19 – the pandemic that pushed the global economy into its worst recession since the Great Depression of 1930. In the context of economic uncertainty, both gold and Bitcoin were considered safe investment channels.
Then, when central banks massively print money and reduce interest rates to 0%, even to the negative threshold, and governments launch huge stimulus packages to save the economy, investors have more reasons to buy gold and Bitcoin: to avoid paper money devaluation and prevent escalating inflation in the long term.
However, with the increase in the value of both of these assets, investors have to choose between gold and bitcoin. Which is better?
Young people like bitcoin
One of the main differences between these two assets is that every Bitcoin transaction can be tracked using blockchain technology. Meanwhile, gold is a much more difficult “black box” to track.
As a result, bitcoin will attract younger investors. In a December study by deVere Group, two-thirds of the consulting firm’s customers who were born between the 1980 and the early 2000s prioritize Bitcoin as a safe investment channel instead of gold.
In reply to CNBC, Mr. Rick Rieder, a chief investment officer of the BlackRock fund, said that Bitcoin is strongly promoted by the younger investors because of the convenience. “Bitcoin transactions have more functions than moving a bar of gold,” he said.
The investment fund management company Fidelity Investments opens a Bitcoin fund – a move seen as an important approval because Fidelity is a large, famous, and long-standing fund. Then, public companies like Square and MicroStrategy announced decisions to invest in Bitcoin.
In the past, since its inception, Bitcoin has always been associated with boom and bust increases, so it is often seen as a speculative asset full of chance. The most recent evidence is that in 2017, the price of Bitcoin increased by 1,375% and approached the $ 20,000 mark at the end of the year, only a year later, the price of the virtual currency fell back to $ 3,000 / oz. Most recently, last week, Bitcoin fell 8.7% – the highest drop since March, after gaining more than 150% this year. Many traditional investors have worried about Bitcoin’s unusual rise and fall.
But this year, supporters of virtual money believe things are different. They argue that Bitcoin has gone through a process of maturing, becoming more familiar and trusted than before. Also, institutional investors and the rich in the US are currently the main force in the Bitcoin market, instead of individual investors in other countries such as China, South Korea, and Japan. Besides, many people consider Bitcoin an increasingly accepted payment method – an advantage that gold does not have.
Therefore, many experts say that if investors transfer a small portion of their gold holdings into the $ 350 billion Bitcoin market, this promises to be a game-changing factor.
Jean-Marc Bonnefous, a fund manager who currently invests in cryptocurrencies, said: “Gold was truly the safe asset of the world in the past and the baby boom generation. Now it is being replaced. with automatic assets like Bitcoin.”
“Bitcoin is establishing the position of a reliable store of value,” CoinShares strategist James Butterfill told Reuters news agency. “This is especially true in the context of unprecedented loosening monetary policy.”
According to Rick Rieder, BlackRock’s head of investment in bonds, Bitcoin will meet the needs of young investors. He considers Bitcoin a method of exchange. Bitcoin transactions “are much more useful than exchanging a bar of gold,” said Mr. Rieder.
Gold is associated with traditional values
However, gold has long been an asset that investors look for when the economy is unstable, or when paper money devalues and inflationary pressures increase. As for Bitcoin, this is a very new role.
Many experts believe that that bitcoin or virtual money can not replace gold as a store value in the future. Since ancient times, gold is a precious metal, with traditional storage value with limited reserves, and its value will increase over time.
Bitcoin is similar to gold because it is very rare, and can be easily portable because of its digital properties. However, gold cannot be completely replaced because it is a kind of material that can be physically secured, held, and controlled without any high technology interference such as the internet, encryption.
Because bitcoin is an asset in cyberspace, it is dominated by many technical factors and the risk of loss. Therefore, bitcoin or virtual currencies are just an option in terms of storage, not completely replacing the value of gold in the future.
In terms of liquidity, you can receive cash anywhere when trading gold but for Bitcoin the market is limited. The number of bitcoins exchanged for cash is subject to a daily limit.
Additionally, the value of Bitcoin is susceptible to the news in the digital currency world. Gold is a safer asset as it is not linked to conventional economic factors that can change its value quickly.
Another difference is, gold is also usable for the semiconductor industries, manufacturing components, while the applicability of bitcoin is still very low.
Gold or Bitcoin?
For Plurimi Wealth Chief Investment Officer Patrick Armstrong, who allocates 6.5% of his investment to gold, even with a higher outlook for Bitcoin, the accompanying risk is too great. He argues that gold has a long history as a store of value that Bitcoin cannot match. “In the world of transactions based on monetary expansion, maybe Bitcoin excels. But also maybe Bitcoin has no value in the years to come,” he said.
“For now, wealthy institutional and individual investors still avoid digital currencies because of transparency concerns, while conservative retail investors consider Bitcoin as a special investment risk-taking channel,” he said.
Meanwhile, some experts believe that the main driver of Bitcoin’s rally is still the speculation and FOMO sentiment (fear of missing opportunities). “The fundamentals of cryptocurrencies have not changed. Bitcoin’s rally is purely driven by speculation when investors want to get rich fast and are afraid to miss opportunities,” said Halley Jeffrey, senior analyst for the Asia-Pacific region in Oanda. “When a financial asset fluctuates more than 10% during the day, it’s ridiculous to consider it a dominant financial asset,” he stressed.
Joseph Edwards at Enigma Securities (UK) said that Bitcoin needs more time to demonstrate quality other than convenience and divisibility. It took 12 years for Bitcoin to demonstrate endurance.
So, gold and virtual money are not meant to be substituted but are meant to be options for holders. Each has a different strength and weakness
Goldman said: “We have not seen any evidence that the rise of Bitcoin can threaten the gold market and believe that two investment channels can coexist.”
“I changed my mind,” Sanford C. Bernstein strategist Inigo Fraser-Jenkins wrote in a report on November 30. “Bitcoin is not going to replace gold, but there is room for both, said Fraser-Jenkins, especially as inflation and debt increase.”