Gold vs. cryptocurrencies

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by Moniruz Zaman

The headline ‘Gold versus cryptocurrencies’ seems a bit like an anomaly. Strictly speaking, apples are not being compared to apples. This is about the generic category of fruits that can exist in an investor’s basket. Gold has been a safe haven for wealth for thousands of years, in contrast, cryptocurrencies can’t boast of such a broad spectrum. Sure the abacus was used for centuries, however winds of change, especially the type seen since the digital revolution, has pushed people to take a serious look at trends emerging today.

Bitcoin, the oldest known cryptocurrency, is not even a decade old; it hit the horizon in 2009. Like the Gold Rush, a sort of ‘crypto rush’ ensued with the result that today, more than 1,800 cryptocurrencies exist. Although most are weak with diminishing, the subject still evokes a strong curiosity. Present generations are known to adopt the latest innovations at speeds like never before. However the rate of failure of ideas and initiatives that appeared brilliant at first sight, is also unprecedented.

To be fair to cryptocurrencies, it’s important to understand the evolution and meaning of the concept, which still remains quite vague. A person who assumed the name of Santoshi Nakamoto first published a paper calledBitcoin: A Peer to Peer Electronic Cash System, in 2008, and almost simultaneously, a website – bitcoin.org, was launched. However, Santoshi’s involvement with this venture was surprisingly short lived, and he weaned himself away from this project by mid 2010.

The architecture of this first digital currency was completely digital or virtual, and is also referred to as an alternative currency. To this day, Bitcoin relies heavily on what is called blockchain, an electronic database that records and tracks all assets, whether tangible or intangible, as well as transaction data, continuously. In this sense it is a low cost ledger. By enabling digital transactions remotely, it makes a variety of transaction types across many asset classes possible and also eliminates the need for face-to-face interactions between a buyer and seller. Any system, for high value exchange of money, has to ensure the highest level of confidentiality and security. Blockchain uses cryptography for this, and the name is derived from the more commonly understood term – encryption.

Cryptocurrencies have had an extremely checkered history. In December 2009, Bitcoin was trading at an all time high of $20,000. The very next month, the currency lost 30 per cent of its value suddenly, which amounted to $44.2 billion. This was close on the heels of an earlier meltdown in September 2017, when China outlawed cryptocurrencies. A large portion of the online drug trade is also conducted in cryptocurrencies. Though, what might be the biggest negative about cryptocurrencies is the fact that they are not backed up by any form of physical wealth, such as precious metals or oil. With the mode being totally unregulated and decentralized, there is no government to back it or step in to arrest any major collapses in their value. Wikipedia labels cryptocurrencies as ‘controversial’. They certainly don’t have a mainstream status yet. There are several reasons for why even the most forward-looking economies prefer to keep cryptocurrencies at arms’ length. Their inability to hold any organization accountable, indirectly encouraging tax evasion, unaccounted income, excessive speculation, and the lack of a foolproof system to prevent hacking, are some of their very pertinent reservations.

In marked contrast to virtual currencies, gold, as a vehicle for investment, has had a far more stable run, and that’s without massive upheavals and catastrophic collapses. Goldprice.org plotted the journey of gold from US$950 per ounce, to US$1,290 until mid May this year. In overall terms there is an uptrend in the last 10 years. In terms of growth, gold has experienced a 314.19 per cent increase in the past 16 years. This growth has been steady by and large, though it has sustained over the longer term, a big boon for medium- and long-term investors. In 2017, though the Federal Reserve System boosted interest rates three times, gold picked up 13.5 per cent value, which is an unmatched yearly gain since 2010. The World Gold Council is upbeat for this year too, and expects demand to be sustained and even accelerated due to overall global growth and the palpable shift from the USD to gold for investment.

Mining.com has quoted the London Bullion Market Association, the globally recognized premier gold body, on the prospect for gold this year, based on a poll of 34 leading gold analysts. “Opinions differ as to the level of the U.S. real interest rates, the likely impact of geopolitical factors, and the pace of global economic growth. Our contributors are divided as to what will have the greater impact and hence we have received forecasts for gold as high as $1,510 and as low as $1,120 and it’s a similar story for the other metals.”The perspective of TD Securities forecasts a high for gold of $1,433, a dip to just below $1,200 and an average of $1,313.

World gold production peaked at 3,150 metric tons in 2017. This represents a 2 per cent increment in the total global gold held above the ground. There is a strong possibility of decline in output because of lower capital amount. As per Bullion Vault, gold exploration budgets have declined year on year since reaching a high of US$9,500 million in 2012, to just US$4,000 million in 2017. Lower output further enhances the prospect of stronger gold prices.

As always, for the future, investors will be driven by their sentiment towards the yellow metal, motivational profiles, time perspectives and risk-taking ability. In short, individual investors have to take their own pick between gold and cryptocurrencies. The cardinal principles of, “No risk, no reward,” as well as, “Slow and steady wins the race,” will both hold true.

References
bitcoin.org <http://bitcoin.org>
Blockchain for Dummies – IBM by Manav Gupta
bullionvault.com <http://bullionvault.com>
Business Insider
exmo.com <http://exmo.com>
gold.org <http://gold.org>
investopedia.com <http://investopedia.com>
khanacademy.org <http://khanacademy.org>
lbma.org.uk <http://lbma.org.uk>
mining.com <http://mining.com>
Wikipedia
youtube.com <http://youtube.com>

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