Bitcoin: All that glistens isn’t gold

We are currently in the midst of a bitcoin led generational change. It’s a tussle between the analogue world and the digital one, and over the last decade, it has become increasingly apparent that the digital world is winning. The growth of the gaming industry has shown us young people prefer Fortnite to the park.

Social media has shown us how people crave digital approval, and zoom has shown us that you no longer need to take transatlantic flights for a meeting. Add to this the recent excitement surrounding the concept of a metaverse and a predominantly digital future appears inevitable.

Amid this backdrop, another challenge is being mounted on the analogue world’s poster boy, gold. This shiny metal has been a store of value for millennia. It has watched countless kingdoms rise and fall whilst maintaining its position as the undeniable global unit of account.

However, this began to change throughout the 20th century. The first sign of trouble came when the Bretton woods agreement appointed the US dollar as the new global monetary standard. Three decades later, and in the face of US stagflation, President Nixon announced the end of the gold standard and with that, a new fiat monetary system was born. While gold remained a safe haven asset, it became a distinctly separate asset class for the first time.

Fast forward to today, and the excesses of government monetary policy are clear to see. A belief from world governments that printing solves all problems has led people once again to crave the certainty of a scarce asset. But step aside gold, Bitcoin‘s in town.

Like gold, Bitcoin’s inefficiency is one of its key selling points. Compared to other cryptocurrencies, it’s slow (only 5-6 transactions per second), it has an energy heavy, out-of-date, consensus mechanism and is relatively ineffective as a daily currency. However, as a gold standard, it’s perfect. It’s infinitely more divisible than gold, it has much lower transportation fees, it can’t be faked, it’s decentralised, there are no storage costs, no spread between spot and bullion prices, and you can be your own custodian with little risk.

To give gold its dues though, Bitcoin isn’t shiny, and you can’t get a photo of you biting it at the Olympics! All things considered, then it’s a close fight.

Jokes aside, while gold will clearly remain an established safe-haven asset in times of economic turmoil, it’s clear that younger generations (and increasingly the older ones too) are now looking to bitcoin to serve the same purpose in a digital era.

Furthermore, comparing gold’s market cap of around $12.25 trillion to bitcoins $815 billion, on a long-term time horizon, it’s hard to argue against bitcoins upside. When investors consider the degree to which Bitcoin has fallen from its all-time highs last year, (Bitcoin’s current price – $43,147 – 24/03/2022) the coin for the more bullish investors is only becoming more attractive.

Interestingly for observers, the recent stock market turmoil caused by the Russian Ukraine war has not produced the same levels of upside for bitcoin. Initially, many believed, the downturn in stocks would lead to a considerable spike in the price of bitcoin. However, that hasn’t proven to be the case. An important consideration for bitcoin is the cost of energy. The sanctions on Russian energy have elevated the price of oil & gas. For bitcoin, which is extremely energy-intensive, upticks in the price of oil and gas are significant and put downward pressure on the coin. However, other factors are at play. With global currency access now restricted in Russia and Ukraine, bitcoin may well be seen as a good solution for those unable to transfer currency for goods and services effectively.

In conclusion, while Bitcoin may remain gold’s brazen and brash younger brother, for now, there’s no doubting his ambition to become the figurehead of the family.

Indeed, it appears the old adage has perhaps never been more apt: All that glistens isn’t gold.

Written by David Beatty, edited by Ciaran McDiamond


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