Is Bitcoin digital or fool’s gold?

Since its creation in 2009, Bitcoin has outperformed all other assets, producing a 170% average yearly return and attracting much attention, from youthful speculators to seasoned major shareholders of technology companies.

After intensive study, the latecomers, many of them previous cynics like myself, have come to the conclusion that there is a case to be made for investing in Bitcoin, which exhibits similar characteristics to gold. To these investors, owning Bitcoin is a safe haven strategy, lending itself as an asset to one’s treasury.

As the adoption of Bitcoin grows, so the chance of its survival increases. At thirteen years old, it cannot yet be compared with gold, which has been mined and owned for 5,000 years, but like gold, the supply of Bitcoin is finite, which creates scarcity. Also, like gold, Bitcoin is not someone else’s liability. In a world of excessive indebtedness and increasing counterparty risk, this is an important consideration.

Gold is a proven insurance against devaluation of currency and other assets because it is not the gold price that determines whether the insurance is fit for purpose, it is the amount of gold owned. For example, for a Roman soldier in the first century AD, an ounce of gold would buy the equivalent of a good suit, and the same is true today.

The gold price is not the same as the price of gold. Some 95% of the gold traded is paper in the spot market and COMEX futures market. The nominal contract price is speculatively manipulated. In contrast, owners of physical gold are not interested in daily price movements, and when the gold price declines, they do not sell. With insurance, it is hoped that circumstances do not lead to a claim on the insurance. So too with gold. We have owned physical gold for our clients for many years, which has proved to be an insurance against the devaluation of currency and other financial assets. Gold has returned a capital gain of 25% pa since 2000.

While gold has been sound money for thousands of years, Bitcoin does not yet have this pedigree and is hitherto untried and untested in a real financial crisis. In theory, Bitcoin should perform well because like gold it is uncorrelated with other assets. Given the politicisation of central banks, negative real interest rates, and yearly depreciation of USD by 6.5 per cent (according to the Congressional Budget Office), investors face a greater risk by not owning physical gold than they do by owning it. There are around 120 million owners of Bitcoin wallets today, which is similar to ownership of the internet stocks in 1997. It is very early in the Bitcoin story. Investors should not put capital into Bitcoin that they cannot afford to lose; equally they should not be without Bitcoin in their investment strategy. Bitcoin complements gold and at least 1% of net worth should be allocated to Bitcoin in a long-term investment strategy. Bitcoin is non-custodial decentralised digital property However, is it digital gold? Only time will tell.

Jeremy Blatch TEP
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