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  • Melvin Mathews

With cryptocurrencies rising - should we invest in Gold or Bitcoin?

Updated: Mar 13, 2023

(Scattered coins media from Wix)

"Transcript of a recent interview with TV news anchor & presenter Ms. Sooyoung on the on the rise of Bitcoin and crypto-currencies as alternate investment options to gold"

There has been much talk over the years, whether Bitcoin's moment has arrived, but it still hasn't stabilised. Still, we see it's value just shooting up, and people are asking whether they should buy gold or bitcoin. Should we expect further volatility?

Some say even though it looks like the moment has arrived for Bitcoin, that it’s not really the case. The reason is people are still not using it for day to day transactions, such as paying for routine shopping, but on the contrary they appear to be hoarding it for future rise in value. And it has already achieved significant value by substantially rising over the last few years.

Among the reasons people prefer investing in Bitcoin or other crypto currencies is the fact that it does not seem to be prone to fiscal measures, such quantitative easing, which may temporarily increase the supply of money in the short term, but results in inflation, devaluation, etc over time, greatly reducing the purchasing power of the traditional money that we hold.

On the question of should we buy gold or bitcoin. We need to perhaps take a step back and evaluate the inherent nature of both gold and bitcoin for investment purposes. There are quite a few similarities that Gold and Bitcoin share:

  • Firstly, both gold and bitcoin have enormous liquidity in their markets, where traditional money can be exchanged for them quite easily in most parts of the world.

  • Secondly, gold is not just used for making jewellery, it also has applications in electronics, dentistry etc. And while Bitcoin is used as a cryptocurrency, its underlying technology 'blockchain' is now finding applications in many areas, from digital transactions to digital contracts.

  • Thirdly, both Bitcoin and gold are not issued by a central bank or federal government and therefore not really dependent on them.

  • Finally, they are both in limited supply, so there is only a certain amount to go around. In the case of bitcoin, only 21 million tokens will ever exist, which is how it was created by the mysterious creator, Satoshi Nakamoto. Similarly, although gold is still mined, the amount we get is so low that demand always outstrips the supply.

On the question of investing, I would suggest investing in both if you have the money and appetite for risk, so you end up with a diversified portfolio.

  • Bitcoin like other crypto currencies has an advantage over gold. The fact that it is decentralised, and not controlled by anybody in particular, means there is virtually no transaction fees. But then, it is also mostly unregulated and unlike gold, which has a well-established system for trading and tracking it, bitcoin infrastructure is not exactly considered safe. In past crypto exchange outages, like the Mt Gox disaster - $460 million worth of investor money disappear.

On volatility, I believe that further volatility can be expected in the short term, as although we have news of vaccines to fight covid19, we still do not yet know what the recovery pathway from this pandemic is likely to look going forward and how we are going to emerge from this as a society.

If we look at the historic price of bitcoin in the last two years. At the highest point, around the beginning of 2018, bitcoin reached a price of about $20,000 per coin. About a year later the price of one bitcoin hovered around $4,000. It is now back to above $20,000. Crypto currency investors do seem to make quick decisions on news as it develops across the world, thereby sending the price of bitcoin upward or downward rapidly. Actually, gold does not seem to have this volatility problem and that could be because of its longer history.

It looks like there's been growing institutional interest in Bitcoin. Why the sudden interest and dramatic increase of holdings?

Institutions are constantly on the lookout for new avenues for profits. Since Bitcoin is so volatile, institutional investors are increasingly looking for newer ways to invest in it, especially every time there is a price dip in crypto currencies.

Recent surveys show, institutional investors intend to increase their Bitcoin allocations, regardless of short-term dips, and that is because:

  • They feel bitcoin has been around long enough, which is about a decade, to develop a certain credibility that time brings.

  • Secondly, some believe that regulations for the crypto market will improve and become clearer in the future.

  • Some also believe that the market will eventually become bigger, providing better liquidity - a feature that most institutional investors are looking for.

  • Finally, all going well, institutions see the long-term value of cryptocurrencies going up - which is exactly what they want.

These could perhaps be the reason for increase in holding by progressive institutions.

But although institutional investors are enthusiastic about increasing their exposure to cryptocurrencies in general, there are clearly many issues regarding the infrastructure that supports these cryptocurrency markets, that still seem to be a concern. For example, since bitcoin was designed mostly as peer to peer system, many institutions are concerned about the lack of insurance for digital assets, while others are worried about the quality of custodial services, trading desks, reporting facilities, etc. Which is why, many conservative institutions are still hesitant to enter the cryptocurrency market.

Could and should crytpocurrencies become mainstream means of transaction in the post-pandemic era and what advantages would they have over banks which are also developing innovative digital transaction methods?

Cryptocurrencies could become mainstream for many reasons:

  • One reason is that billions of people around the world still lack access to basic banking infrastructure and traditional means of finance, such as loans, mortgages or other forms of credit. With cryptocurrency, as mentioned earlier these same individuals can, in theory, send value across the globe for almost no fee.

  • At the same time, I also think that for any cryptocurrency’s true potential to be realised, especially for those without access to traditional banks, the lack of internet penetration is the main issue. But this can change very quickly, if for example, SpaceX's Starlink program can commence providing inexpensive satellite internet to the people living in rural and remote areas.

  • In the case of traditional banks, at the moment what they are doing and providing, does not seem to have significantly changed and this is partly because they are heavily regulated. What they have achieved so far is to provide the same services online that they once provided in the physical world, that is, in brick and mortar bank branches.

Central banks and governments have been at loss on what to do with cryptocurrencies. How should they approaching this blind spot and is there a way of designing a regulatory framework that works?

Govts have power because they control the supply of money. That is not something they are willing or ready to give up that easily.

  • What has worked in favour for crypto-currencies so far, is the fact that the volume is quite low, in comparison to the volumes that fiat currencies globally turnover.

  • Secondly, as mentioned earlier, at the moment people are buying to hold as an asset and not to use for their daily transactions.

  • Thirdly, cryptocurrencies are designed to exist without any intervention by any government. Hence it will continue to co-exist and flourish if govts don’t interfere.

Barring a few govts, most governments have not seen crypto currencies as a significant threat to the current status-quo of existing fiat currencies. Hence, so far govt motivation for regulation has been only to curtail illegal activities such as money laundering or for tracking transactions involving illegal drugs, weapons, smuggling, terrorism, etc.

Some of the most progressive countries that have not hindered the growth and use of cryptocurrencies in the AsiaPacific region are Japan, South Korea, Australia and Singapore. While In the western world Canada, UK, Switzerland, France, USA, are examples of countries that we can perhaps classify are friendly to crypto currencies.

China and India are examples of two countries that have either banned its citizens or advised its citizens not to dabble in cryptocurrencies. This despite the fact that until recently 70-80% of all Bitcoin mining globally happening in China. Last year the Chinese govt took the step to ban mining as well.

Let me know your thoughts

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