Cryptocurrencies will Never Replace Gold for a Number of Good Reasons
Still in the Early Innings of Cryptocurrencies
Speaking of the future, I spoke on the topic of the blockchain last week at the Subscriber Investment Summit in Vancouver. My presentation focused on the future of mining—not just of gold and precious metals but also cryptocurrencies.
Believe it or not, there are upwards of 2,100 digital currencies being traded in the world right now, with a combined market cap of nearly $150 billion, according to Coinranking.com.
Obviously not all of these cryptos will survive. We’re still in the early innings. Last month I compared this exciting new digital world to the earliest days of the dotcom era, and just as there were winners and losers then, so too will there be winners and losers today. Although bitcoin and Ethereum appear to be the frontrunners right now, recall that only 20 years ago AOL and Yahoo! were poised to dominate the internet. How times have changed!
It will be interesting to see which coins emerge as the “Amazon” and “Google” of cryptocurrencies.
For now, Ethereum has some huge backers. The Enterprise Ethereum Alliance (EEA), according to its website, seeks to “learn from and build upon the only smart contract supporting blockchain currently running in real-world production—Ethereum.” The EEA includes several big-name financial and tech firms such as Credit Suisse, Intel, Microsoft and JPMorgan Chase, whose own CEO, Jamie Dimon, knocked cryptos a couple of weeks ago.
To learn more about the blockchain and cryptocurrencies, watch this engaging two-minute video.
Will Bitcoin Replace Gold?
Lately I’ve been seeing more and more headlines asking whether cryptos are “killing” gold. Would the gold price be higher today if massive amounts of money weren’t flowing into bitcoin? Both assets, after all, are sometimes favored as safe havens. They’re decentralized and accepted all over the world, 24 hours a day. Transactions are anonymous. Supply is limited.
But I don’t think for a second that cryptocurrencies will ever replace gold, for a number of reasons. For one, cryptos are strictly forms of currency, whereas gold has many other time-tested applications, from jewelry to dentistry to electronics.
Unlike cryptos, gold doesn’t require electricity to trade. This makes it especially useful in situations such as hurricane-ravished Puerto Rico, where 95 percent of people are reportedly still without power. Right now the island’s economy is cash-only. If you have gold jewelry or gold coins, they can be converted into cash—all without electricity or WiFi.
Finally, gold remains one of the most liquid assets, traded daily in well-established exchanges all around the globe. Every day, some £13.8 billion, or $18 billion, worth of physical gold are traded in London alone, according to the London Bullion Market Association (LBMA). The cryptocurrency market, although expanding rapidly, is not quite there yet.
I will admit, though, that bitcoin is energizing some investors, especially millennials, in ways that gold might have a hard time doing. The proof is all over the internet. You can find a number of TED Talks on bitcoin, cryptocurrencies and the blockchain, but to my knowledge, none is available on gold investing. YouTube is likewise bursting at the seams with videos on cryptos.
Bitcoin is up 350 percent for the year, Ethereum an unbelievable 3,600 percent. Gold, meanwhile, is up around 10 percent. Producers, as measured by the NYSE Arca Gold Miners Index, have gained 11.5 percent in 2017, 23 percent since its 52-week low in December 2016.
Look Past the Negativity to Find the Good News
The news is filled with negative headlines, and sometimes it’s challenging to stay positive. Take Friday’s jobs report. It showed that the U.S. lost 33,000 jobs in September, the first month in seven years that this happened. A weak report was expected because of Hurricane Irma, but no one could have guessed the losses would be this deep.
The jobs report wasn’t all bad news, however. For one, the decline is very likely temporary. Beyond that, a record 4.88 million Americans who were previously sitting out of the labor force found work last month. This helped the unemployment rate fall to 4.2 percent, a 16-year low.
There’s more that supports a stronger U.S. economy. As I shared with you last week, the Manufacturing ISM Purchasing Managers’ Index (PMI) rose to a 13-year high in September, indicating rapid expansion in the manufacturing industry. Factory orders were up during the month. Auto sales were up. Oil has stayed in the relatively low $50-a-barrel range, which is good for transportation and industrials, especially airlines. Small-cap stocks, as measured by the Russell 2000 Index, continue to climb above their 50-day and 200-day moving averages as excitement over tax reform intensifies.
These are among the reasons why I remain bullish.
One final note: Speaking on tax reform, Warren Buffett told CNBC last week that he’s waiting to sell assets until he knows the plan will go through. “I would feel kind of silly if I realized $1 billion worth of gains and paid $350 million in tax on it if I just waited a few months and would have paid $250 million,” he said.
It’s a fair comment, and I imagine other like-minded, forward-thinking investors, buyers and sellers will also wait to make huge transactions if they can help it. Tax reform isn’t a done deal, but I think it has a much better chance of being signed into law than a health care overhaul. – Frank Holmes
Why Cryptos Won’t Kill Gold
Cryptocurrencies have shown a lot of resiliency. Every time doubters proclaim Bitcoin is on the mat for good, it manages to claw its way back up.
Bitcoin went into a freefall after the Chinese government announced plans to ban cryptocurrency trading on all domestic exchanges. But early Monday, the digital currency hit its highest level since early September.
The steady climb of Bitcoin and its meteoric rise this year have led to some speculation that digital currencies may usurp gold. There have been headlines proclaiming cryptocurrencies are killing the yellow metal. But there are some fundamental reasons cryptos will never replace gold.
A recent Forbes article pointed out some important characteristics of gold that will prevent Bitcoin and other cryptocurrencies from ever being able to completely push it out.
Most of the focus now is on Bitcoin. But as Forbes points out, there are somewhere in the neighborhood of 2,100 digital currencies traded in the world right now, with a combined market cap of nearly $150 billion, according to Coinranking.com. We are in the early stages of the crypto revolution. We have no idea which cryptos will ultimately shake out as winners and losers. Betting on any one crypto at this point is risky.
Although bitcoin and Ethereum appear to be the frontrunners right now, recall that only 20 years ago AOL and Yahoo! were poised to dominate the internet. How times have changed! It will be interesting to see which coins emerge as the ‘Amazon’ and ‘Google’ of cryptocurrencies.”
On the other hand, gold has a history of preserving and even growing wealth that goes back centuries.
Gold also has physical characteristics cryptos lack.
Fundamentally, Bitcoin and other cryptocurrencies are nothing more than an electronic medium of exchange. They strictly function as a form of currency. They have no intrinsic value. In fact, they don’t even exist in the material world. Gold has value beyond the fact that it is money. It is highly valued as jewelry, and it is increasingly being used in technological applications from medicine, to electronics, to energy production.
Most importantly, gold does not depend on the internet or electricity to work. That could be significant in the event of a major disaster, as the Forbes article points out. If the power grid goes down, or the internet is out, your $1 million of Bitcoin won’t do you much good.
Unlike cryptos, gold doesn’t require electricity to trade. This makes it especially useful in situations such as hurricane-ravished Puerto Rico, where 95% of people are reportedly still without power. Right now the island’s economy is cash-only. If you have gold jewelry or coins, they can be converted into cash—all without electricity or WiFi.”
Forbes offers another important reason we probably shouldn’t say last rights over gold just yet.
Finally, gold remains one of the most liquid assets, traded daily in well-established exchanges all around the globe. Every day, some £13.8 billion, or $18 billion, worth of physical gold are traded in London alone, according to the London Bullion Market Association (LBMA). The cryptocurrency market, although expanding rapidly, is not quite there yet.”
None of this is to say there is no place for cryptocurrencies in the modern world. The development of a decentralized, anonymous system of exchange that doesn’t rely on government is nothing short of revolutionary. And a lot of people have made a lot of money in cryptocurrencies. It’s just that cryptos lack some important features gold and silver posses. Bitcoin is not a replacement for gold. Although they share some similar characteristics, they are fundamentally different things.
Of course, you don’t have to choose one over the other. You can buy Bitcoin and gold. You can even buy gold and silver with Bitcoin. In the world of investing, it’s never wise to put all of your eggs in one proverbial basket. Diversifying your cryptocurrency portfolio with precious metals can help mitigate some of the potential downsides and put you in an overall stronger financial position. – Peter Schiff
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