Will Cryptocurrencies Replace Gold?

The value surge of Bitcoin in 2017 has piqued the interest of the financial community and raised the question as to whether cryptocurrencies will replace gold as the dominant safe haven investment.

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Mad Money host Jim Cramer argues digital tokens will not be replacing gold as a repository of value in the foreseeable future.

Along with most other financial analysts, we’re inclined to agree with Cramer.

Investing in gold is a centuries old response to geopolitical instability and economic meltdowns. Spikes in historical gold charts can all be linked with world events that weakened the strength of fiat currencies.

Like gold, Bitcoin has shown that prices rise in relation to political events. But does this mean there is any validity in replacing the yellow metal with digital currencies?

Gold is a physical asset

The strongest argument the crypto-community has is that Bitcoin and other cryptocurrencies are the money of the future. Whilst this may be the case, digital payments rely on power. What will happen during a power cut?

When natural disasters strike and wipe out the power supply, you won’t be able to pop to the corner store to buy your staples. Some parts of Puerto Rico were without power for more than six months in 2018.

There has to be a contingency for natural disasters in the future. It will be dangerous to dispose of fiat money completely, but a store of gold that can be exchanged for cash in a bank provides a solution.

Gold is proven to act as a hedge

In times of an economic crisis, investors turn to gold because they know the price will go up. Assets that are tethered to fiat currencies on the other hand lose money because banks have to lower interest rates.

If cryptocurrencies become legal tender and the primary means of trade, digital tokens will effectively replace fiat currencies. In such circumstances, banks will have to lower the value of cryptocurrencies in the same way they depreciate currency in order to encourage spending.

As a result, cryptocurrencies will not be a good investment in the event of an economic crash. They are, therefore, redundant as a hedge against other investments.

Cryptocurrency market is too volatile

Although cryptocurrencies can be used as trade vehicles to buy goods and services, they are, in effect, artificial commodities. Like fiat currencies, the value of a digital token is dependent on market participants.

The value of Bitcoin for example, changes in accordance to the number of people that are using it or investing in it. This makes the cryptocurrency market highly volatile – and, like the Forex market, a dangerous game for investors to play.

Cryptocurrencies can therefore not be considered as a safe haven investment.

Gold on the other hand is a steadfast commodity with a high liquidity. According to the London Bullion Market Association, around $25-$30bn worth of physical gold are traded on a daily basis.

The cryptocurrency market may be expanding quickly, but digital tokens will replace fiat currencies – not gold. Precious metals will still be relied up by investors to diversify portfolios and build a store of wealth.

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