Why cryptocurrencies can’t replace gold?

Cryptocurrencies and gold are different assets that have their own places in the financial industry. Both of them are very valuable and there has been a long discussion about whether crypto can replace it.

Experts of the World Gold Council consider it inappropriate to compare gold with cryptocurrencies in general and Bitcoin in particular. They list five fundamental differences between these two assets and note that Bitcoin should not compete with the “opponent” whose value is tested for millennia and stable demand from the central banks.

If we take a look at 2017, this was a turning point for Bitcoin. Gold grew by only 13%, while “digital gold”, or Bitcoin, rose 13 times. All year the growth of the cryptocurrency was accompanied by talk that it will supplant the real precious metal. However, the cryptocurrency has several fundamental differences from gold. Why, according to experts, there can be no equality between them?

Gold is less volatile

While the value of currencies was secured by gold, the price of precious metals moved in the wake of inflation. However, recently fluctuations in the value of this asset do not exceed 10% per year, while the volatility in the cryptocurrency market is 10 times higher, experts have calculated. Only in mid-December 2017, the price of bitcoin changed by more than 40%. The value of Bitcoin varies by an average of 5% per day. While this is good for investors looking for high-yield investments, this is hardly typical for currencies, let alone valued assets. This volatility potentially limits the ability to use Bitcoin as a payment method.

Gold is more liquid

The gold market is much more liquid than the cryptocurrency market. In addition, since many investors simply keep cryptocurrency in their portfolios, it is still unclear what impact one or more major players can have on the market. Also, the time and costs of transactions on the sale and purchase of cryptocurrency raise questions.

Despite the fact that today the market capitalization of cryptocurrencies is estimated at $555 billion, according to Coinmarketcap, this volume seems to experts ridiculous compared to the scale of the market of gold or fiat currencies. Bitcoin trading volumes do not exceed $2 billion per day, which is less than 1% of the total trading volume in the gold market.

Demand for gold is diversified

Gold has a 7,000-year history as an asset, for many years it played the role of money, and now it is bought by both central banks and institutional and retail investors. In addition, 50 to 60% of the annual demand over the past 20 years comes from the jewelry industry in China and India.

This precious metal is also actively used for the production of computer chips, which are also needed in order to mine Bitcoin.

Cryptocurrencies, on the other hand, are needed only to play the role of tokens in electronic payment systems. Potentially, they can have useful characteristics, but at the moment the ability to spend Bitcoins is limited, so everyone prefers to convert them into fiat money.

The supply of gold is elastic

There are still some similarities between gold and Bitcoin. Thus, the number of bitcoins mined increases by about 4% per year, and by 2140 the mining process will stop. Although gold production is not limited to any date in the future, its production remains at a consistently low level. Each year, its reserves increase by only 1.7% per year.

Another similarity between gold and cryptocurrencies is that they are not recognized at the state level, i.e. official units of exchange. At the same time, Bitcoin itself is not unique – it can be replaced by any other cryptocurrency.

The gold market is regulated

The gold market is regulated, whereas cryptocurrencies still have problems with international supervisory bodies. Most countries are still undecided about regulating the cryptocurrency market. For example, Japan is as loyal to the new asset class as possible, while China has significantly restricted its use.

Today, monetary policy is a key tool of the Central Banks. If people choose to make cryptocurrency transactions instead of fiat money, it will reduce the effectiveness of a monetary policy.

The issue of competition

According to the World Gold Council, investors in Bitcoin should worry because of competition not with gold, but with other cryptocurrencies. Bitcoins and cryptocurrencies in general will not replace gold, which is a proven and effective investment tool in portfolios. Gold on yield at different times competed with the stock market and has proven itself in times of rising inflation. It was a highly liquid asset that helped diversify the portfolio, illustrating the negative correlation with the market during recessions.

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