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10 key takeaways on gold, Bitcoin and the Elon effect

Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." - Sir John Templeton

Irrespective of whether you think Bitcoin is a Ponzi scheme, the future of money, or something in between, there is no doubting it is grabbing global attention as front-page financial news.

Prices rose to more than US$50,000 per coin in February 2021, helped by news that Tesla invested US$1.5 billion into the cryptocurrency. From early March 2020, when it was trading below US$5,000, the Bitcoin price rallied more than 1,000%, though it has pulled back in the last two weeks.

Has Bitcoin taken gold's mantle?

The skyrocketing price of Bitcoin has more or less coincided with a meaningful pullback in gold, as shown below, which had traded at all-time highs above US$2,000 per troy ounce in August 2020.

Gold and Bitcoin prices – December 2019 to February 2021

Source: World Gold Council, LBMA, Coinmetrics, data to morning of 17 February 2021

Given the divergent fortunes of the two assets in the past few months, there is no shortage of commentators stating that the precious metal is being usurped by its purported digital counterpart, with some going so far as to encourage investors to drop gold and reallocate to Bitcoin instead.

Our latest report, Gold, Bitcoin and the Elon effect (linked below), questions the wisdom of this narrative, not least because of the multiple bubble warning signs in cryptocurrency markets today.

These include the parabolic price move itself, the launch of Bitcoin ETFs and planned IPOs of cryptocurrency exchanges. It is hard to think of a more euphoric moment for Bitcoin than the world’s richest man using company money to invest in this nascent asset class.

Despite those warnings, we have no strongly held view on where the Bitcoin price goes from here, and acknowledged that as a market, it has matured since the last mania seen in 2017. There is now better transparency around liquidity data, enhanced custody solutions and a range of new product offerings, all of which are helping generate interest. Our report highlights the multiple attributes by which investors can, and indeed should, compare gold and Bitcoin, which remain two vastly different investments.

With one notable exception, gold appears to have advantages over the world’s most famous cryptocurrency.

10 key takeaways on gold versus Bitcoin

  1. Bitcoin beats gold hands down for generating speculative returns in rapid fashion, and likely always will. There is a price to pay for this, with larger drawdowns (price falls), and volatility that is 12 times higher than gold.
  2. The gold market (which includes gold used in jewellery form, industry, ETFs and physical bars and coins) is significantly larger in terms of overall value, with a market capitalisation that is more than 10 times the Bitcoin market. The gold market is substantially more liquid, averaging approximately 90 times the daily turnover of the Bitcoin market in 2020, though liquidity in cryptocurrency markets has risen substantially in the past few months.
  3. Free storage options for gold can be much lower risk than free Bitcoin storage options given the counterparty risk inherent in the latter.
  4. Gold is a lower cost investment than Bitcoin, with gold ETPs like Perth Mint Gold (ASX:PMGOLD) offering gold exposure for 0.15% p.a. versus 1-2% p.a. for existing Bitcoin products.
  5. Gold has a more diverse set of use cases – for investment, as a reserve asset for central banks, as a display (and store) of wealth in jewellery form, and in industry. Bitcoin is almost exclusively used for speculation, with payment volumes across the cryptocurrency network declining in the last three years.
  6. Gold has a multi-millennia track record as a store of value and has been the best performing asset in equity market corrections over the past 50 years. In contrast, it is far too early to say that Bitcoin is a store of wealth. This is no fault of Bitcoin per se, rather an acknowledgment that it has only existed in an era of low inflation, economic expansion (up until COVID-19), and a record bull market run in equities.
  7. Physical gold can play a beneficial role in a portfolio, given its low overall correlation to financial assets, its traditional outperformance in risk-off environments, its high liquidity and lack of credit risk. By comparison, despite the recent surge in the price, there seems little compelling reason for institutional investors or companies to include Bitcoin in diversified portfolios or on company balance sheets.
  8. Gold’s network effect is far stronger than Bitcoin’s, evidenced by the perpetual marketing of Bitcoin as digital gold. Gold is not marketed as analogue Bitcoin!
  9. Bitcoin remains under threat both from hard forks and corruptions of the Bitcoin network itself, as well as thousands of other cryptocurrencies. Gold remains globally recognised as a store of wealth, a status that has been built over thousands of years and remains rock solid (pun intended) today.
  10. The gold market is far more decentralised, with the precious metal mined, refined, and owned by central banks, households and investors the world over. Bitcoin is predominately held by a small group of owners, and Bitcoin mining is concentrated in one country, China, which controls more than 60% of Bitcoin's hash rate.

Given the above factors, the precious metal will still likely be the preferred investment option for risk-conscious investors looking to protect capital in the years ahead.

The full report can be accessed here.

 

Jordan Eliseo is Manager of Listed Products and Investment Research at The Perth Mint, a sponsor of Firstlinks. The information in this article is general information only and should not be taken as constituting professional advice from The Perth Mint. You should consider seeking independent financial advice to check how the information in this article relates to your unique circumstances.

For more articles and papers from The Perth Mint, click here.

 

14 Comments
Bernie
March 11, 2021

Another key point:
Accessibility in emergencies - wars, cybercrime and any event that can cause prolonged electricity failure, prevent the internet from functioning or destroy electronic mobile devices makes it impossible to access Bitcoin or even prove ownership. Physical gold is almost indestructible and can be used in these scenarios to buy food or other essentials and pay for services.

Alexander MCCLINTOCK
March 11, 2021

IMHO there is a case for *both*, rather than an either/or choice. They have different roles - as is apparent in the article. :)

Michael O'Hara
March 08, 2021

It's an interesting debate to hold in a zero-interest-rate environment amid global tsunami's of hot capital.

Central bankers admit that we are in the midst of a currency cold war, and determining the 'true' (as opposed to relative) value of currency is nigh impossible.

In that context, can Bitcoin provide some form of haven for global currency, removed from Central Bank profligacy? If it can then we are faced with the Beta/VHS conundrum as Bitcoin competes with Eretheum and 4,000 other cryptocurrencies. I have read that the combined capitalisation of cryptos stands at well over $1tr. If it is air then there is an awful lot of destruction of value to come, should cryptocurrencies fail to provide some service other than speculation.

Gold has long been considered a store of value but it cannot compete with cryptocurrencies in the spotlight of Reddit / social media mania. 10x returns in one year from Bitcoin make gold lose a lot of its lustre, but that doesn't stop it from holding a stronger argument for basic portfolio inclusion than Bitcoin and other cryptocurrencies.

Brian
March 05, 2021

"Bitcoin is predominately held by a small group of owners, while mining is overwhelmingly concentrated in one country."
Presumably the mining comment is an error, rather than ignorance ... esp from the Perth Mint.
Viz; "The top 10":
Country Gold Production 2020 tonnes
China 383.2
Russian Federation 329.5
Australia 325.1
United States 200.2
Canada 182.9
Peru 143.3
Ghana 142.4
South Africa 118.2
Mexico 111.4
Brazil 106.9



Graham Hand
March 05, 2021

Hi Brian, Jordan means the majority of Bitcoins are mined in one country, we'll make that clearer. China is the undisputed world leader in Bitcoin mining. Chinese mining pools control more than 60% of the Bitcoin network's collective hashrate.

David
March 04, 2021

I've worked in investment markets for 20 years. You can always tell when a 'fad' is about to end when a bunch of fund managers rush to market to take advantage of the hype.
My view - nobody has been able to clearly articulate to me why Bitcoin is an 'investment'. Its a giant ponzi scheme entirely reliant on someone being stupider than you to keep buying 'it

Neilx
March 07, 2021

That is a reference to Bitcoin mining not gold.

Alan
March 04, 2021

I owned The Perth Mint ETF because it was backed by physical gold, then I discovered on an overseas website it was bought out by Goldman Sachs Asset Management. No notice from Perth Mint, no mention in The Australian Financial Review. The ETF is probably just paper gold by now...

Meanwhile, when people talk about Bitcoin in this fashion are they conflating it with the whole crypto space - are they saying I don't believe we are at the dawn of Web 3.0? If so, they should do themselves a favour and get educated about the Etherium / Polkadot network and also study Hedera Hashgraph (HBAR). In the case of Hedera, EFTPOS Australia have just signed onto the HH governing council and will be using the new technology if offers.

Jordan Eliseo
March 04, 2021

Hi Alan, Perth Mint Gold (ASX: PMGOLD) is operated by The Perth Mint, and is backed by gold held by The Perth Mint. The ETF that was sold was listed on the NYSE. As for the potential developments in the wider crypto sphere, I have no doubt it is an exciting space, and that there will be a range of eye catching developments in years to come. This report is purely focused on the safe haven, monetary and investment characteristics of gold and bitcoin, and should be viewed in that light.

scott
March 04, 2021

Extraordinary Popular Delusions and the Madness of Crowds. Bitcoin, Bit CON!. (In the movie the "Sting" they liked to say the "Big Con!") A few points to consider: 1. Bitcoin is not an ESG worthy investment. Bitcoin uses more electricity annually than the whole of Argentina. Mining" for the cryptocurrency is power-hungry (Cambridge University analysis). 2. Bitcoin is unregulated and a great haven for criminals. 3. Bitcoin is not a tangible asset or a medium of exchange (its fairy dust mix with hot air). 4. From 1634 to 1638 tulip mania was in full swing (at its high, a bulb sold for USD$750,000.00 equivalent). 5. Need to accumulate more fools into Bitcoin at higher levels (easier with the internet ie. reddit, wallstreetbets). 6. Bitcoin is simply about Greed and Greed (Fear will come later). I have a lot of respect for Tesla but Wall St are now in on the Scam, just like they were with CDO's, Sub prime and Ninja loans. Wall Streets Mantra "sell'em a hope and a promise and ship'em SH#T. It's a pity main stream media are too spineless to call out Bitcoin for for what is and what it is not. It is NOT an investment!

Shawn
March 04, 2021

Bitcoin looks more like a Ponzi Scheme, which is why I have never Bothered with buying into it. However it appears to be performing better than gold, which will continue until the great sell-off happens, and it goes back to the initial bitcoin owners. Rinse and repeat.

Fred
March 04, 2021

Obviously, needs to be read in the context of the author ... "Jordan Eliseo is Manager of Listed Products and Investment Research at The Perth Mint"

Graham Hand
March 04, 2021

Hi Fred, fair comment but it's also a legitimate debate to have, whether Bitcoin is replacing gold. There is a lively discussion in financial markets and Jordan is putting his side. Here are another two voices:

Peter Schiff:

Mark, a lot of your athletes wear #gold jewelry. Ask them why. Gold has many uses outside of Jewelry that contribute to its value as a metal. It's not hyped at all. Gold is money. #Bitcoin is 100% hype. It's nothing. Blockchain is a technology, but it's better applied to gold.

Mark Cuban:

Let me help Peter. Gold is hyped as much as Crypto. Do we really need gold jewelry? Gold can make you a ring. BTC/Eth are technologies that can make you a banker, allow friction free exchange of value and are extensible into an unlimited range of biz and personal applications.

And back and forth it goes.

Carlos
March 05, 2021

Yes. We need gold jewelry ! It's been used as such for thousands of years. Seen anyone wear a bitcoin ring ?

 

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