Cointelegraph investigates the pros and cons of storing one’s assets in Bitcoin versus storing them via traditional methods such as gold bullion, and speaks to a number of cryptocurrency experts to hear their view.
One of the biggest arguments against the cryptocurrency is that it has no inherent value, and as such cannot be considered a safe investment, as if people stop perceiving it as having value, your assets are lost, as it is not backed by anything in the same way that paper money is backed by state gold reserves.
As Dominik Żynis, President & CTO of Stealth Company, put it:
“Gold is a store of value that goes back many thousands of years, while bitcoin is relatively new and still out to prove itself. Actually bitcoin is more like a specific kind of coin, whereas p2p consensus blockchains are more like gold the metal. What I am saying is bitcoin might be lead (the metal).”
However, Patrick Dugan, CIO of Crypto Currency Concepts, suggests a different model: “I would argue that bitcoin the asset is like gold, and p2p cryptographic consensus is like physics. Gold's proof-of-work is all them supernovas what forged it!”
Firstly, it's important for one to decide what they’re looking for in a means of asset storage. Do they want a stable rate of return, very low price volatility and by the same token, price stability, or very high returns that come with an increased chance of loss?
Right now, if you’re looking for the first two, gold bullion or other precious metal storage is probably your best bet, with Bitcoin being the most favourable for the latter function. However, many in the Bitcoin community foresee Bitcoin becoming something of a ‘virtual gold’ as the price stabilises and becomes a solid means of stable asset storage.
David Andolfatto of VP Fed Bank of St-Louis sees Bitcoin becoming the next safe asset, saying: “Is Bitcoin a safe asset? You're probably thinking no, of course not. The dollar price of bitcoin can be quite volatile. One can easily gain or lose 50% over a very short period of time. So if we're talking about an asset that offers a stable rate of return, Bitcoin ain't it.”
However, he further elaborates:
“Except that this is not what I mean by a safe asset. I'm not even sure how to precisely define what I mean by safe asset. Loosely speaking, I'm thinking about an asset that people flock to in bad or uncertain economic times. In normal times, it's an asset that is held despite having a relatively low rate of return, perhaps because of its use as a hedge, or because of its liquidity properties… I think that Bitcoin could be the world's next great safe asset. At least, it certainly seems to have all the properties that are desired in a safe asset.”
The properties he is referencing include:
- Bitcoin constitute no legal claim against anything of intrinsic value, it is simply a record-keeping technology, meaning it is not pegged to any other monetary instrument’s value.
- It pays no interest, so can be stored for extensive periods of time.
- Possession corresponds to ownership, so confiscation by regulatory bodies is less of a risk.
- The ledger has proven itself secure, so Bitcoin is not at risk from traditional theft in the same way that gold and other precious metal bullion is.
- The money supply is fixed at 21 million BTC, so it will not devalue over time.
He concludes by saying that even if Bitcoin is not a particularly ideal monetary instrument, this does not preclude it from serving as a safe asset or longer-term store of value. Once market penetration is complete, its return behavior is likely to mimic the return behavior of any other safe asset. Safe assets generally earn a low expected return (that is, they are priced dearly).
Addressing to the investors, David Andolfatto says:
“Investors can expect to earn unusually high returns in a crisis event. But if you buy at the top, you can expect to realize unusually high losses when the crisis subsides. In short, it's a great investment -- assuming you can predict when a crisis will occur and when it will end!”
High risk, high return
For those looking for an investment that is high risk, but high return, many would argue that Bitcoin is their best bet. As Rik Willard, CEO of MintCombine, suggests, if you want high returns on gold, it “needs to stay in the ground...to spur value,” something many miners, especially those looking to turn a quick profit in the business of illegal mining, are not prepared to do.
Also on the topic of illegal gold mining, another reason for choosing Bitcoin over the traditional gold bullion is that you can be comfortable with the knowledge that your assets are not being stored in a means thats origin was potentially morally reprehensible.
This comes as a new study has shown that water and food sources for 19 Indigenous Yanomami and Yekuana communities in the Brazilian Amazon contain dangerously high quantities of mercury as a result of illegal mining, which has led to researchers finding that 90% of people in these communities had been severely affected by mercury poisoning.
Tone Vays of LibertyLifeTrail.com would argue that Bitcoin truly is "Digital Gold" but because it's so new there is significantly more price volatility risk which is a trade off vs. a much larger potential future valuation. While gold has been a store of value for thousands of year, gold does not adjust for technological innovation to improve standards of living and that is why the stock market has always outperformed gold in any 30-year time period.
Another big problem with gold is that it has a huge political risk as authorities can confiscate it from any vault and as Gold Money recently found out, there is too much regulation preventing the creation of a gold-based payment system.
Tone Vays explains to Cointelegraph:
“Gold is also no longer useful as a safe haven to transfer value cross-borders due to the invention of metal detectors and scanners. Both bitcoins and gold are difficult to protect when they are in your passion, but given the technological advancement, Bitcoin should start to become the obvious choice over the next 10 years as the better protective asset.”
Alex Matanovic, CEO of Serbian Bitcoin exchange, ecd.rs, also spoke to Cointelegraph about the pros and cons of Bitcoin and gold bullion. He says that while gold is superior in being a store of value, Bitcoin is the investment choice for someone looking for profits. However, one must consider that Bitcoin may not be the consumer’s choice in the distant future.
Alex Matanovic on why he prefers gold to bitcoin says:
“Although I really love bitcoin, I would give a gold an edge when it comes to the ‘store of value’ function. We are talking about long-term investment and bitcoin is still very young, just over 7 years old, it needs to stand the test of time. That’s what gold has done better than anything else, being a reliable store of value for thousands of years.”
At the end of the interview Matanovic points out that Bitcoin has been a better investment choice than gold for the most of the last 7 years. It might well keep being so in the years to come, but gold is definitely a safer bet.
Matanovic on the future of bitcoin says:
“No one could argue that decades from now gold would still be a very valuable asset. On the other hand, the future of bitcoin is way more uncertain. It could end up being 10 or 100 times more valuable than it is now, but it could also be made obsolete by newer and technologically superior cryptocurrencies. It wouldn’t be the first time that the pioneer in some industry is eventually replaced by the newcomers.”