By Jasper Hamill
The gold standard was finally abandoned more than 50 years ago and replaced by fiat currencies which have value because, well, the government says they do.
But the rise of crypto has prompted speculation that blockchain-based currencies could revive the old-fashioned idea that money needs to be pinned to some external asset. In other words: could a cryptocurrency like Bitcoin become the new gold?
William Je of Hamilton Investment Management Ltd. is the latest investor to weigh in on this debate in an analysis that charts how crypto has gone from being “a channel for money laundering to becoming a serious proposition for investors very quickly”.
“Our traditional understanding of an asset in finance terms is generally anything of worth to an individual or company, or more specifically it can be regarded as a resource ‘of value’ that can be, in turn, converted into cash,” he wrote.
“Typically, an asset can often generate cashflows. For instance, stocks can provide dividends, bonds can provide coupons, loans can provide interest, etc. However, there are assets in existence that don’t tend to produce cashflows, but they’re still regarded as an important asset class. For instance, this can include assets such as gold, wine, and even art.
“Gold is widely considered to be an important asset class by many. This is the case considering, It has limited industrial use doesn’t generate cashflows. The collective thought is that gold is valuable, and this is what provides the value to the asset; an inflated artificial value that we give to a shiny lump of metal.”
Gold is not only rare on Earth, but in the entire universe. The Aztecs called it “god excrement" and suggested it fell from off the sun and plunged to Earth - which isn’t far off the truth. It is thought to be formed when stars explode in supernovas or during the collision of neutron stars.
Just 244,000 metric tons of gold have been found on Earth, which is enough to fill a cube that is 28 meters wide on each side. This scarcity is one reason that has become a store of value, with the other being a now-universal agreement that it is actually valuable. The days of the dollar being convertible to gold are long gone, meaning the dollar is largely regarded as a global reserve because of the success of the US economy.
Je said that investors are currently “divided” on whether cryptocurrencies should be considered an asset class, let alone the “new gold”.
Major banks are currently “testing the crypto waters”, with Morgan Stanley and Bank of America launching their own crypto-focused research divisions. State Street has also founded a dedicated digital finance division whilst JP Morgan and Goldman Sachs have begun rolling out their own crypto trading services.
“For a currency to prosper, belief and confidence is the most important factor for its success. The issuers of fiat currencies are sovereign entities that are deemed to be the most trustworthy. If an economic crisis occurs that leads to governmental distrust, the value of the fiat currency has the potential to drop substantially,” Je continued.
“In the past, financial institutions and investors have primarily recognised only ‘traditional’ asset classes. They regard cash and equivalents, bonds, and stocks as the big three. However, since the rise of cryptocurrency (a decentralised means of digital currency) in our society many have questioned whether also be regarded as an asset class. This debate is more important now, than ever before, especially as legislators and policymakers have continued to ponder upon taxing cryptocurrency in line with other assets.”
In his analysis, Je said that crypto was “without doubt, a new asset class”. Its value is boosted by scarcity - which is why precious metals have been the pillar of many economies for centuries.
The Bitcoin supply will never exceed 21 million coins, whilst the mining reward is halved every four years or so - creating scarcity. Both these factors boost its usefulness as a store of value.
“There is a broad consensus that Bitcoin is the most valued—and thereby appealing—cryptocurrency on the market,” Je wrote. “Experts have largely accredited this to its scarcity, Bitcoin in particular benefits from investor confidence because of its snowballing popularity.
“Just as people in society believe in the value of diamonds because others believe in it, Bitcoin shares this artificial value. Widespread social adoption, together with their privacy, security, and transferability, make cryptocurrencies a significant asset class to store values.”
However, when it comes to the big gold question, Je’s thoughts are clear.
“It is not gold, as we have repeatedly said,” he warned. “Risks do exist and they are well known, and some would argue, substantial. We are therefore firm believers that the financial industry needs to address—and support—government initiatives around regulation.”
So Bitcoin isn’t the new gold, at least not according to William Je, but is certainly an important asset class. Most of humanity already agrees that the dollar and other fiat currencies are valuable. Will they soon say the same about Bitcoin?
Find out how gold is performing against Bitcoin by clicking here.
