Bitcoin: fool’s gold or the new gold?

Bitcoin is flourishing because investors want an “apocalypse hedge”.

(Image credit: © Getty Images/iStockphoto)

published 15 January 2021

Of course bitcoin is a bubble – a bubble you can’t ignore Should you buy into the bitcoin boom, or stick with gold?

Is bitcoin “fool’s gold” or the new gold? asks James Dean in The Times. The cryptocurrency hit a new record high of $42,000 late last week, only to plunge by more than 20% over the weekend. Yet at around $34,500 in the middle of this week, bitcoin has still rocketed since October, when it cost $11,000.

A poor payment option

Once the preserve of “basement-dwelling libertarians” who hoped to upend the financial system, today bitcoin is close to becoming a mainstream investment, says The Economist. It turned out to be poor payment option: the network can only handle a few transactions per second.

Instead, the new hope is that it could emulate gold as a store of value that sits beyond the reach of government mismanagement. Younger investors appear to prefer digital wallets to the hassle of managing physical bullion. Yet “fraud and theft” are still “rampant” in the world of bitcoin trading. What’s more, the cryptocurrency’s price tends to move in line with stockmarkets, undermining its credibility as a “safe-haven” asset.

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Bitcoin’s reputation for “extreme price swings” is still limiting its institutional uptake, says Dean. A store of value is not that useful if it can lose over a fifth in a weekend. Still, those who think bitcoin can “shake off” these problems think there could be big returns to come. JPMorgan estimates that bitcoin would have to quadruple before the total market value matched the $2.7trn that private investors have put into gold. That could imply an eventual bitcoin price of $146,000.

Regulators remain cautious

The comedian John Oliver once joked that bitcoin is “everything you don’t understand about money combined with everything you don’t understand about computers”, says Gavyn Davies in the Financial Times. Regulators are still cautious. This week the Financial Conduct Authority (FCA) warned British investors that “cryptoassets” involve “very high risks”. Consumers who invest “should be prepared to lose all their money”.

Yet ultimately governments will be more comfortable with the idea of cryptocurrency as a replacement for gold than cryptocurrency as a replacement for sovereign fiat money. The latest “frenzy” looks “dubious” to me, but we live in strange times.

Slowly but surely, bitcoin is “being domesticated” says Gian Volpicelli on wired.co.uk. The latest bitcoin run has felt positively “staid” compared to the unbridled mania of the 2017 boom and crash, when investors burnt their savings on “unrealistic promises of endless revenues”. Crypto-based hedge funds doubled their assets under management to $2bn between 2019 and 2020, according to a report from PwC and Elwood.

Yet perhaps the cryptocurrency’s rise is a sign that we have all got a little wilder too. The “chaos and despair” of 2020 has shaken faith in conventional monetary and political systems, says Lex Sokolin of blockchain business Consensys. As a result, institutional investors are looking for an “apocalypse hedge”.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.