A fierce debate has been raging in investment circles: Is bitcoin a genuine contender to gold’s hegemony as the go-to store of value?
About two years ago, the Winklevoss twins quipped that bitcoin would one day become better at being gold than gold itself, adding that the only advantage the yellow metal has over BTC is a 3,000-year head-start. Have we arrived at this point yet?
The bitcoin camp has made its case: BTC has many attractive features that trounce gold’s including being mathematically scarce, harder to counterfeit, portable, transferrable and superior divisibility thus allowing micro-transactions (try buying a latte using a gold bar).
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A peek at their recent price actions might convince you that bitcoin has even usurped gold’s role as the pre-eminent safe haven asset.
BTC price has spiked as trade tensions between Washington and Beijing have reached fever pitch yet bullion has hardly budged—up less than 1 percent over the past seven days.
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BTC turns into a dinosaur
But the gold camp now says not so fast. For many gold punters, cryptocurrencies stands zero chance of ever replacing gold. One such gold bug is CEO of Wheaton Precious Metals, Randy Smallwood. In a telephone interview with Kitco News, Smallwood, says that simple physics prove that cryptocurrencies will never replace gold.
His argument is straightforward, ‘‘The beauty of gold is that it’s a solid asset. It’s been around for a very long time and will continue to be around. The problem with cryptocurrencies is that the market is always changing and you constantly have to watch it.’’
But here comes the punchline, “All cryptocurrencies are virtual and therefore are replaceable. But there is only one type of gold.”
Smallwood says that the crypto industry is so fragmented that thousands of companies are competing to create their own versions that five years from now BTC will look like a dinosaur compared to the sexy and younger upstarts that will flood the market.
Indeed, Smallwood has a point. Experts usually put forward three possible scenarios that would make BTC and possibly other cryptocurrencies irrelevant:
- Government Takedown
- A Facebook hard fork
Scenario #1 is about the tokenization of everything with the world creating a hyper-efficient barter system with every company launching its own cryptocurrency and an automated system that would allow people to trade their assets seamlessly.
Campbell Harvey, a professor of Finance at Duke University, puts it this way:
“Think of this as an incredibly efficient barter system. Barter is generally inefficient, but if you have a network and you tokenize the goods and services and enable it with a blockchain, it can become very efficient. Without a network, you have to find the person that wants to trade four goats for the cow. That’s very difficult, to find that person. But with a network and with collateralization of blockchain-based tokens, it’s much easier.”
In scenario #2, a government like the U.S. could conceivably come up with its own “Fedcoins” to replace fiat. To carry out any transaction, everybody would be required to set up a wallet with the Federal Reserve or an affiliate bank. The nodes running the transactions would be updated by institutions approved by the Fed such as large Wall Street banks.
In the final scenario, Facebook would simply leverage its enormous 2-billion-plus user base by convincing a large number of users to branch off and run their own proprietary BTC software effectively forcing a hard BTC fork similar to Bitcoin Cash. Alternatively, FB could create its own third-party BTC wallet then integrate it in its product suite.
But what is the likelihood that any of these ideas working out? Probably not very much. It’s far more likely that a new project spawned in the blockchain space itself with better value proposition than BTC e.g. faster transaction and lower fees will ultimately be responsible for bitcoin’s demise. And right now we are nowhere near finding that magical cryptocurrency.
Finally, it’s a bit preposterous to presume that bitcoin could ever fully replace gold. Gold is not only a useful inflation hedge but also has intrinsic value since 70 percent of global demand goes to jewellery, electronics and other Industrial uses. This helps keep the price of gold relatively stable. Virtual currencies, on the other hand, have no comparable intrinsic value which makes them far much more volatile and therefore poor inflation hedges.
Further, the notion that gold prices have remained flat is one-sided because gold prices have been flirting with all-time highs when measured in dozens of other currencies including British Pound, the Euro, the Swiss Franc and Chinese Yuan.
But supposing BTC is able to fully replace gold? Then prices in 6-or 7-digits would suddenly become reality.
By Alex Kimani for conil.me
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