Commodities & Metals

The Reserve Currency Lesson of Gold Versus Bitcoin, and a Blockchain Surprise

It is far from a secret that bitcoin and other cryptocurrencies have been devastated in 2018 and into 2019. The media might say that they have been decimated, but if you know the historical use of that word it is actually far worse than that. Now we have a report from the World Gold Council pointing out that gold has risen while cryptocurrencies tanked with the global equity indexes in the fourth quarter of 2018.

Some investors already know about this quite well, but the underlying message about reserve currencies may be the more important part of this message. As for cryptocurrencies as a replacement for stocks, note that bitcoin’s price was shown to have resembled a technology stock instead with a drop of 55% during the fourth quarter alone. Meanwhile, there was a 19% drop in the Nasdaq.

Gold was last seen trading up just over $1,300 per ounce. A rough range for gold in the past year has been a high of roughly $1,350 per ounce and a low of roughly $1,175. Meanwhile, the website CoinDesk showed that the price of bitcoin was around $3,400. That’s down from when it was approaching $20,000 back in late-2017.

Many crypto-experts were predicting that the new end-game for bitcoin and other digital coins was to become the new reserve currencies for the public. That didn’t happen, and the World Gold Council says that cryptocurrencies had their time to shine but instead flopped. It said:

In the fourth quarter of 2018, as global stock markets experienced their worst quarter since 2009, cryptocurrencies had a prime opportunity to demonstrate qualities associated with safe havens like gold. However, cryptocurrencies, such as bitcoin, behaved like risky assets and fell while gold rallied… we believe there are several reasons why cryptocurrencies are no substitute for gold. Specifically, gold is less volatile and enjoys a more liquid and established market. It has a well understood role in an investment portfolio and minimal overlap with cryptocurrencies on many sources of demand and supply.

While the total market value of cryptocurrency markets fell sharply in the fourth quarter, the World Gold Council points out that the lack of support in a strong two-way market was an issue. And unlike the strong two-way market support for gold, the council is saying that cryptocurrencies simply do not provide the liquidity needed in times of financial tension. It added:

The fourth quarter offered just one data point for bitcoin analysis, but it was an important one. This was one of the few periods during which true market stress has occurred since the financial crisis. And it should lead investors to reassess their reasons for investing in cryptocurrencies… While cryptocurrencies may have a role to play in the financial markets, their behavior in an environment of market uncertainty underscored that they are not a viable substitute for gold as a safe-haven.

Another serious risk for cryptocurrencies is the raw supply and a lack of barriers to entry. It goes without saying that all the world’s gold already has been made. There were more than 1,400 cryptocurrencies available, and new technology or new issues ahead also could have an impact on the value and supply of any of the cryptocurrencies. That, of course, includes bitcoin.

While the World Gold Council has a vested interest in promoting gold (and talking down the cryptos), it actually did talk up the importance of the underlying blockchain technology and its distributed ledger mechanism. The council noted that blockchain is genuinely innovative and could have many applications across financial services and beyond. Various players in the gold market are even exploring blockchain in the context of transforming gold into a so-called digital asset and for tracking gold across the supply chain. Another use can be for efficiencies into the settlement processes around and after gold transactions are made.