Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 240

Bitcoin: digital gold or fool's gold?

Over the past few months, I've taken one question more than any other: "What do you think about Bitcoin?" Through 2017, Bitcoin, the world's first cryptocurrency, rose by almost 1,200%, prompting excitement and bafflement.

My answer: I'm enthusiastic about the Blockchain technology that makes Bitcoin possible. In fact, Vanguard is using such technology. As for Bitcoin the currency? I see a decent probability that its price will go to zero.

Are cryptocurrencies currencies?

Bitcoin's creators introduced the cryptocurrency in the wake of the GFC. The goal was to bypass governments and banks when two individuals want to transact. No country, company, or institution controls the currency. But are Bitcoin and competing cryptocurrencies really currencies? Let's think about what a currency is:

  • A currency is a unit of account. Cryptocurrencies qualify, as they can measure the value of other goods and services.
  • A currency is a medium of exchange. I'd give cryptocurrencies a qualified yes on this point. Currently, only a limited number of vendors globally accept cryptocurrencies, and recent volatility has already discouraged increased adoption.
  • A currency is a store of value. Bitcoin is not. Its price volatility undermines its adoption, as fewer vendors will accept a currency whose value can fluctuate so dramatically. The prices of newer currencies have been similarly volatile.

The existential dilemma

Let's call the verdict on the currency question mixed. Even if cryptocurrencies qualify as currencies for niche purposes, their prospects seem dubious.

The greatest threat is central banks, which have started to research Blockchain-based currencies and impose regulations on exchanges. Given the additional control and policy effectiveness that digital currencies could provide, central banks have good reason to adopt digital currencies in the coming decades. Those currencies would be ‘legal tender’, legally recognised forms of payment for all debts and charges.

If the choice were between Bitcoin or a Blockchain-based dollar, which would you rather have in your digital wallet?

Cryptocurrencies as investments

The investment case for cryptocurrencies is weak. Unlike stocks and bonds, currencies generate no cash flows such as interest payments or dividends that can explain their prices. National currencies derive their value from the underlying economic activity of the countries that issue them. Cryptocurrency prices, on the other hand, are generally not based on economic fundamentals. To date, their prices have depended more on speculation about their eventual adoption and use. The speculation creates volatility that, ironically, undermines their value as a currency.

Nor are cryptocurrencies a chance to capitalise on Blockchain technology, which is the method most cryptocurrencies use to record network transactions and ensure their accuracy. Although cryptocurrencies are built using a Blockchain, they are not necessarily tied to the value of Blockchain applications that may improve the cost, speed, and security of executing transactions or contracts. Bitcoin is an investment in blockchain in the same way that Pets.com was an investment in the internet.

For investors, adding some exposure to Bitcoin would mean reducing their allocations to tried and true asset classes such as stocks, bonds, and cash—the building blocks for well-diversified portfolios that can help them meet their goals. With no cash flows and extreme volatility, the investment case for Bitcoin is hardly compelling.

We are early in the development of Blockchain technology. We'll likely see Blockchain adopted by governments and enterprises for specific purposes in the coming decades. As innovation quickens and competition increases, the majority of networks (and their associated cryptocurrencies) may be rendered obsolete, leaving many cryptocurrencies like tulip bulbs in 17th-century Holland—soaring to incredible heights before the speculative bubble pops.

And, unlike tulips, they don't look good in a vase.

 

Joe Davis is Global Chief Economist at Vanguard, a sponsor of Cuffelinks. This article is in the nature of general information and does not consider the circumstances of any investor.

 

4 Comments
John
February 19, 2018

Anyone prepared to comment on USI-Tech ?? Just that there seems to be a lot of people around that have been sucked in by their marketing.
Also this link may be of interest
https://www.cgdev.org/sites/default/files/blockchain-and-economic-development-hype-vs-reality_0.pdf

Felix
February 18, 2018

Chris, are you referring to Central Banks or commercial banks? Commercial banks offer the services we all need such as loans to buy houses, and cards that we can pay for things with a tap, credit cards that we can use overseas without the need to carry foreign currency. Central Banks ensure the monetary system is functioning. Central banks were instrumental in softening the blow from the 2008 financial crisis, and have done so whilst providing price stability. On the other hand cryptocurrencies are useless as mediums of exchange, and stores of value, and have higher transaction costs than standard bank issues payments systems.

In other words, what problem currently exists in our current payments/monetary system that requires a solution that is volatile, unregulated, prone to hacking and requires contributing to climate change by production of useless digital tokens?

Blockchain technology is a different issue, and may be developed into something useful, but that is irrelevant to the fact that all cryptocurrencies will revert to a price/value of NIL in time.

Chris
February 18, 2018

Too brief of an article to portray the broad scope of 1400+ cryptocurrencies and blockchain technology. Also how did the author barely touched on the smart contract potential of Ethereum and the potential use cases in everyday life, and that being a key reason people are speculating/investing and value of bitcoin going up based on first mover basis.

Also people are sick of centralised banks. If I had the choice, decentralised currency, does not have to be bitcoin, will always win over anything a bank can offer me.

Alex
February 14, 2018

Bitcoin is not a ‘medium of exchange’- nobody is accepting Bitcoin since the crash started (even before the crash, maybe 0.0001% of retailers in the world accepted it as payment for goods or services).

 

Leave a Comment:

RELATED ARTICLES

What's behind the surge in Bitcoin and gold?

Gold remains solid as Bitcoin melts

Bitcoin as the new gold, or where I’ve seen this before

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.