Why bitcoin will never eclipse gold
Gold has no equal as a store of wealth, says Merryn Somerset Webb.
Bitcoin is back. One digital coin will now cost you £22,700, 65% more than in December. This makes sense to lots of people. The banking crisis has, one fan tells us, “drawn attention to bitcoin as a new way of storing wealth that is free from centralised points of failure”. Hold bitcoin and you get a hedge against inflation, an asset that will rise in price (thanks to limited supply) and of course a medium of exchange.
Maybe, maybe not. More likely not. Bitcoin sounds grand in theory. In practice it is anything but. The cryptocurrency isn’t a hedge against inflation (it is still down 35% in a year). It isn’t trusted: if there was any good in it, the bad is doing a fine job of driving it out (I give you FTX). It isn’t easy to use, and as most of those who try to use it find out, it isn’t madly convenient.
Unless you have illegal intentions you might as well use an actual bank to transfer your money around the place. Bitcoin is also becoming less convenient. In today’s world, everything needs an on- and off-ramp via the existing monetary system: you need to fill your Coinbase account with something before you buy your crypto in the first place. You might think that your bitcoin is sticking it to the man (it’s decentralised and independent of government) but you need the bank the man runs to get in and out of it. That’s an increasingly big problem for crypto fans.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
There has been much talk recently of how US regulators are coming for crypto (they definitely are). But a more immediate problem is that an awful lot of US banks won’t bank anyone in the business. Financial firms are, says Bloomberg, increasingly imposing lengthy application forms on crypto businesses, “turning away smaller companies and in some cases refusing to work with the sector altogether”.
The same is happening in the UK, where banks are placing daily limits on how much their customers can send to crypto exchanges every month. The truth is that while bitcoin – and even some other crypto coins – might work in a vacuum, they are little use when they have to interact with the real world.
Avoid the hassle of cryptocurrencies
So here’s the question. If you want something that has all the good-sounding bits of bitcoin without all the hassle, why not go for something else? Perhaps physical bitcoin, as John Stepek and I like to call it; God’s bitcoin as Orbis’s Alec Cutler puts it – or, as it is known to most people, gold.
Imagine, says Cutler, that a divine ruler had written a white paper for gold, just as the inventor of bitcoin apparently did for his new currency. Humanity will, he might have thought, need “a convenient and reliable vehicle for the preservation of wealth and universally trusted medium of exchange, for both government-issued and peer-to- peer transactions”, one that “will maintain its value for all eternity”.
What would this perfect vehicle look like? It would be durable, distinctive, easily divisible – and easy to use. You would be unable to manufacture it from other elements. There would be a limited amount of it on earth and it would be difficult to find and to process – so the total amount available would be finite and the amount in circulation would grow at only a small percentage every year.
Over time it would become globally trusted, because nothing else would ever be found that combined all the characteristics that made it work so well. So here we are. Gold has been used as a medium of exchange for millennia – and it works just as said divine being might have wished it would.
It is also the only thing that does. The problem with gold, however, is that while gold is hugely reliable long term (for most of history one ounce has equated to the rough price of a hand-made, high-quality set of clothes, for example) it isn’t, as Duncan MacInnes of Ruffer points out, madly reliable in the short term.
It doesn’t go up and down in tandem with inflation in the short term. Sometimes it overshoots and stagnates, sometimes it lags and then plays catch up. We may now be getting to a catch-up stage. The gold price has been lagging: an ounce currently comes in at £1,600 while a bespoke Savile Row suit comes in at more like £5,000. But there are signs that might not last much longer. Look to last year: the gold price did nicely in sterling but barely budged in dollar terms. You could look at that and say it is useless – after all, inflation was around 10% everywhere by the end of the year.
However, you could also look at it and think it is rather amazing that it managed that: gold provides no yield, so with interest rates rising from roughly nothing to 4%-5% last year, the opportunity cost of holding it soared. Yet people still held it. That will have been partly with an eye to inflation but the rich would also have had an eye to Russia. Once you have witnessed just how quickly and efficiently Western countries can confiscate the assets of the citizens of other countries you might begin to think to yourself that holding physical gold in a non-Western location seems like a pretty good idea, says MacInnes.
Central banks are clearly thinking something similar: both the Chinese and Indian ones are known to have been buying up large quantities (they must have read God’s white paper). They aren’t stocking up (as far as we know) on crypto. The Ruffer Investment Company (LSE: RICA) has about 5% of its assets under management in gold and gold equities. For higher exposure, readers might look to long-term MoneyWeek favourite the Personal Assets Trust (LSE: PNL), where that is more like 11% – with 9% in actual bullion. Nothing digital there.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Domino’s Pizza faces £3m hit from the Budget - should you invest?
Domino’s Pizza Group has forecast a £3 million tax hit following the Autumn Budget
By Chris Newlands Published
-
How to boost your pension by £33,000 by paying it an annual Christmas bonus
Contributing an extra £400 into your pension pot this festive period will give the gift of compound interest and should make your retirement feel more jolly and bright
By Ruth Emery Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go? We round up the best investing apps
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated