Is Crypto the Equivalent of Gold in the Financial Markets?

Cryptocurrency is a digital currency that only exists on the Internet. While it is often portrayed as gold coin, it is anything but. Virtual currency serves many purposes, including store of value, medium of exchange, and a unit of account. In this sense, it acts in much the same way as fiduciary currency (fiat currency). Virtual currency a.k.a. cryptocurrency like Bitcoin, Ethereum, Litecoin, Ripple, Bitcoin Cash and the like are readily available on blockchain networks. Each blockchain network is distinct. Bitcoin was the first cryptocurrency in the world, established by an entity/individual by the name of Satoshi Nakamoto. In 2008, the world was hardly ready for cryptocurrency and the dramatic technological benefits of the blockchain network.

There was an interesting case of an individual paying thousands of Bitcoin for 2 large pizzas. Today, it’s precisely the opposite scenario where a small percentage of a Bitcoin could purchase dozens of pizzas. According to Coin Market Cap, there are 1,644 registered cryptocurrencies operating in 11,223 markets. The combined market capitalization of these digital currencies is $345.876 billion (subject to large daily fluctuations). Not surprisingly, Bitcoin remains the dominant cryptocurrency with a market share of 37.7%. From virtually nowhere to an asset category worth hundreds of billions of dollars, everyone is beginning to ask the question: Is cryptocurrency the new gold?

What Makes Gold So Valuable?

Gold is a financial asset, not unlike cryptocurrency. Gold is unique in the sense that it acts as a store of value and is a hedge against stock market volatility. Typically, gold fares poorly when stock markets are in the ascendancy. Gold typically bristles when investors take a bearish perspective on stocks. Cryptocurrency like gold, is a finite asset, although it is an intangible asset. Gold is measured in metric tons or ounces, while cryptocurrency is measured in units. A total of 21 million Bitcoin (BTC) will be available according to a complex logarithmic function. This places it on the finite spectrum of commodities;much the same is true with Litecoin, Ethereum, Bitcoin Cash, Ripple, and others.

Gold is currently priced at $1,300 per ounce, up 3.46% over the past 6 months, and up 0.23% over the past 1 year. When viewed over the long-term, gold has a remarkable performance, gaining 296.17% since 2002. While the gold price is significantly lower than its 2011 price of $1,800 + per ounce, it has been gaining ground since January 2017 when it was priced at approximately $1,140 per ounce. To better understand the correlation between cryptocurrency and gold bullion, it’s important to work with accurate data. Leading market analysts from Wilkins Finance postulated a comprehensive cryptocurrency definition that covers all aspects of digital currency. In layman’s terms, cryptocurrency is virtual money. It can be transferred between parties electronically, and it is an effective medium of exchange, or ideal for investment purposes if you are okay with high levels of volatility. Cryptocurrency is traded in many forms, not least of which is a CFD format.

In terms of correlations between crypto and gold, the parallels are rather limited. While both asset classes are highly volatile, gold tends to retain value when markets sour. Cryptocurrency by contrast, is subject to high levels of speculative sentiment, and is dependent upon liquidity for survival. People generally tend to pull their money from crypto markets when regulatory constraints are fashioned. As the long arm of the law continues to impose legal frameworks on crypto markets, we are seeing volatility decreasing, alongside profitability. The price of Bitcoin has hovered in the $7,000 – $8,000 range for quite some time, and that is unlikely to change anytime soon. Unless an investor has significant resources available, it is difficult to purchase Bitcoin and profit from price movements.

Is It Wise to Pull Money from Gold Investments and Deposit into Crypto?

Consider that most people can only purchase a fraction of a BTC, and any appreciation is also measured fractionally. Unlike new ICO’s and cryptocurrencies, Bitcoin is a mature market with slower growth potential. One workaround is a Bitcoin CFD whereby you can open a much larger trading position using leverage, but that is best left to informed traders and investors. If these two asset classes are so different, what does cryptocurrency mean for gold investors? As stated earlier, cryptocurrency and gold are polar opposites of one another. Cryptocurrency remains extremely volatile and while gold bears some of that volatility, it does not hold a candle to crypto.

Gold is deemed a long-term store of value. Prices may fluctuate over the short to medium-term, but returns are generally positive over time. We simply don’t have enough information available about cryptocurrency to ascertain whether it is a viable investment. While nobody disagrees with the merits of blockchain technology, we do not know where we are going with this new age paradigm. We do know that the shift to Bitcoin and other cryptocurrency is taking place at the expense of gold, since money is being pulled from one asset class and being deposited into another. Is this a wise decision? Only time will tell.


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