Might Bitcoin be the new gold?
And what is Bitcoin?
Bitcoin is a digital (electronic) currency. It’s stored on-line and used to settle transactions. Where we once used dollars and cents, we can use Bitcoin. More often it is known as a cryptocurrency. Of which there are many – it just happens that Bitcoin was the first to be created, in 2009, and therefore has become the best known. Others include Ethereum, Ripple and Litecoin.
If Bitcoin has been in conversation in recent years, likely the focus has been on the opportunity to make money, but that it is speculative at best. There is now increasing discussion of Bitcoin as a serious investment option, over and above its core task of settling transactions. Particularly now there has been a drop in fraud concerns and increased safety in on-line storage options. It is even possible to buy insurance against Bitcoin theft and hacking.
Gold meanwhile has been regarded as a store of value for centuries. Currencies, countries and investments have periodically collapsed but gold has endured – maintaining its value. Which is interesting in that you can’t eat it, if planted it doesn’t grow food, it doesn’t produce a regular income. It does have a tangible value in that there are some manufacturing processes that require it. And it doesn’t corrode. But largely gold is only valuable because we continue to believe it is and that over the centuries humans have been emotionally and physically drawn to it.
The outcome is that, in periods of instability, owning gold is seen as a safe haven. Might that same belief system one day apply to Bitcoin? There is that possibility.
One requirement for being a good store of value is scarcity. Gold has that. But so does Bitcoin. There will only ever be 21 million Bitcoin in existence. Scarcity isn’t of course a guarantee of success. In 16th century Holland, tulip mania took hold with seeming rational people paying more than ten times the average annual salary for a single tulip bulb. Subsequently the market collapsed, and value was lost.
If there is a valid comparison to gold as a store of value, what might that mean for the future price of Bitcoin. On a valuation basis Bitcoin is about 2% of the total value for gold – that suggests the potential for a significant increase in value over time.
Bitcoin is increasingly being considered as a legitimate investment. The price of Bitcoin will undoubtedly be volatile, but it also moves in a different pattern to shares and property, thus adding diversification benefit to a portfolio.
Most of us won’t buy Bitcoins ourselves. We will leave it to expert managers who might add positions of 1% to 2% into a diversified portfolio. Some already are.
It will be interesting to watch the Bitcoin journey and that of cryptocurrencies generally.
If Bitcoin has been in conversation in recent years, likely the focus has been on the opportunity to make money, but that it is speculative at best. There is now increasing discussion of Bitcoin as a serious investment option, over and above its core task of settling transactions. Particularly now there has been a drop in fraud concerns and increased safety in on-line storage options. It is even possible to buy insurance against Bitcoin theft and hacking.
Gold meanwhile has been regarded as a store of value for centuries. Currencies, countries and investments have periodically collapsed but gold has endured – maintaining its value. Which is interesting in that you can’t eat it, if planted it doesn’t grow food, it doesn’t produce a regular income. It does have a tangible value in that there are some manufacturing processes that require it. And it doesn’t corrode. But largely gold is only valuable because we continue to believe it is and that over the centuries humans have been emotionally and physically drawn to it.
The outcome is that, in periods of instability, owning gold is seen as a safe haven. Might that same belief system one day apply to Bitcoin? There is that possibility.
One requirement for being a good store of value is scarcity. Gold has that. But so does Bitcoin. There will only ever be 21 million Bitcoin in existence. Scarcity isn’t of course a guarantee of success. In 16th century Holland, tulip mania took hold with seeming rational people paying more than ten times the average annual salary for a single tulip bulb. Subsequently the market collapsed, and value was lost.
If there is a valid comparison to gold as a store of value, what might that mean for the future price of Bitcoin. On a valuation basis Bitcoin is about 2% of the total value for gold – that suggests the potential for a significant increase in value over time.
Bitcoin is increasingly being considered as a legitimate investment. The price of Bitcoin will undoubtedly be volatile, but it also moves in a different pattern to shares and property, thus adding diversification benefit to a portfolio.
Most of us won’t buy Bitcoins ourselves. We will leave it to expert managers who might add positions of 1% to 2% into a diversified portfolio. Some already are.
It will be interesting to watch the Bitcoin journey and that of cryptocurrencies generally.
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Stephen McFarlane is an adviser with NZ Funds Private Wealth in Timaru. The opinions expressed in this column are his own. A copy of Stephen’s Disclosure Statements are available on request, free of charge.
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First published in the Timaru Courier on 17 December 2020, as 'Cryptocurrency glimmers; is it gold?'
