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Bitcoin and Gold

Author: Ian Davis - Bullion Manager

Published: 24 Nov 2021

Last Updated: 24 Nov 2021

Synopsis

The debate surrounding gold and Bitcoin can get heated at times. At the risk of further upsetting either side, I wish to provide an informed view to give our customers an introduction to the 'crypto space'.

Please note this discussion is not intended to constitute investment advice, I am not a financial adviser, and I would always recommend that you consult with one. If anything, I am an industrial pharmacist, turned musician, turned bullion dealer so decide for yourself if you listen to me about cryptocurrency.

In the interests of full disclosure, I am a personal investor in gold, silver, Bitcoin, Ethereum and other financial utility tokens. I may not have exposure to all classes simultaneously, yet I see value across the board, my views are my own and not representative of the wider business

Bitcoin - Digital Gold?

It should be obvious that we are gold bugs through and through, and we believe in physical gold ownership to protect wealth. We have built a business that continues to grow and flourish around this very ethos. Gold has several attributes that make it perfect for the job such as no counterparty risk, scarcity, durability, desirability and thousands of years of use in jewellery, as a commodity and as a base for monetary systems. These factors contribute to the belief and evidence-based use case that gold is king and the best hedge against inflation.

I do not wish to dismiss gold and its physical value for a digital asset, quite the contrary, as I do not claim that Bitcoin can be worn as a watch, or used to plate the jack leads that I use for my musical instruments. However, part of gold's value is directly attributable to a perceived store of wealth, in that investors buy the metal to "hodl" (crypto lexicon) in vaulted storage, under the garden shed or the floorboards purely because they expect it to hold value. The gold is not looked at, traded or used in any utilitarian way whatsoever and this is how a large percentage of gold owners interact with their investment. Yes, we can say it has fundamental value to a jeweller, an electrical engineer or a dentist but if you strolled into a dental surgery with a 1 kilo bar, would the dentist buy it and melt it down for fillings? I doubt you would get close to spot in any event!

The two major properties that allow gold to hold value are scarcity and durability, in that the supply to the market is very low, and as the metal is inert, it means your wealth will not degrade. Bitcoin was conceived in 2008 by Satoshi Nakamoto (thought to be a pseudonym) and satisfies the same two criteria that I believe make gold a great store of value. The Bitcoin network is a perfected system in that the supply is finite (as dictated by the protocol) and your wealth once added to your bank in cyberspace will not degrade or devalue, ever (save a protocol change and more on that later).

Now in the age where technology is disrupting the material world and digital natives expect to access all their information in the cloud, Bitcoin could become a complement to gold and a means to protect your wealth. After 55 years + in the bullion industry are we seeing a digital asset disrupt the status quo?

Enter Bitcoin...

It will be entertaining for readers to learn we have a mixed view on Bitcoin between the management team here at Chards with some sold on its use case whilst others remain deeply sceptical, which includes Lawrence Chard. I have been interested in the space for years and have watched the market mature since about 2014. If nothing else, Bitcoin has provided nothing but legendary memes and entertaining stories for the past few years. 

Bitcoin Struggles

The early days saw several bad actors tarnish the reputation of exchanges with the most high-profile case being that of the Mt. Gox hack. This world is almost unrecognisable from today's recommended use of Yubikey authentication and intense 'Know Your Customer' (KYC) onboarding requirements. Criminal activity and dubious transactions on the dark web Silk Road website did nothing to clean up the appeal to society and instead, Bitcoin enthusiasts and investors who saw true libertarian value and utility were quite often ridiculed. The retail bubble of 2017 added more weight to the argument that Bitcoin is nothing more than a speculative asset of no intrinsic value and that any sensible investor should steer clear.

Demand has quite simply not gone away and here we are in 2020/2021 with another surge in price. This time it gets interesting as hedge funds and traditional financial institutions including wealth managers are taking serious positions. In mid 2020 news broke of MicroStrategy (software company come crypto hedge fund) investing cash reserves upwards of $780 million, Greyscale (an investment trust) now own something north of 650,000 BTC with several other big players pinning their hopes on bitcoin. Anyone with social media will know the names and faces I refer to. In addition, PayPal announced in early 2021 they will allow payment processing from Bitcoin wallets, but this is still routed via fiat currency. Quite a bit of hype I hear you say.....

These headlines counter crypto-sceptic views as serious companies and corporations are seeing real value and adopting the network, thus driving interest and price. Not only that, these moves add to consumer confidence as ownership risk is reduced as custodians and professionals take responsibility for insurance costs.

If this is all breaking news you may feel inclined to jump straight onto Coinbase or Kraken and blow your savings! At this point I do urge caution as this is the crypto-hype train in motion, but it does explain the recent all-time record bitcoin price of almost $70,000 in November 2021.

Why Has It Taken 13 Years?

No serious traditional investor can invest in a product on behalf of their clients where there is uncertainty about what it even is, how it is taxed or even whether it is going to be legal the following year in the investing country!

Many governments have now laid out a regulatory and tax framework that is allowing traditional investment firms and wealth managers to take positions, safely understanding the implications of ownership and most importantly, disposal. Not only this, but exchanges have also had to comply with anti-money laundering and terrorist financing rules, implementing robust KYC processes during onboarding. This is a far cry from Bitcoin's libertarian roots but the harsh reality of the ideal touted by the Bitcoin purists was always unlikely to fly. How, for example, could the business world run on a set of anonymous transactions? This would just result in unfair competition and far from honest accounting practices leaving any effort in vain by honest proprietors.

This recent shift in asset recognition, and the ability of governments to generate revenue via capital gains tax (CGT) and income tax has really projected Bitcoin into the mainstream.

Is Bitcoin Worth Anything?

Well, the price and ongoing demand year after year can speak for itself!

Bitcoin, more so than gold, runs the risk of evaporating into nothing as its value is derived from a perceived store of value rather than any physical attribute. If on the other hand gold loses its status as the primary store of value, there would still be some value left for industrial application. However, industrial use does not make up very much of the market share if we consider this data set from the World Gold Council (WGC) data at the end of 2019:

Total above-ground stocks (end-2019): 197,576 tonnes

  • Jewellery: 92,947 tonnes, 47.0%
  • Private investment: 42,619 tonnes, 21.6%
  • Official Holdings: 33,919 tonnes, 17.2%
  • Other: 28,090 tonnes, 14.2%

Private investment together with official holdings (central bank purchases) make up almost 40% of the market and any price deterioration (resulting from loss of appeal as a store of value) would likely see an exit of significant number of stakeholders in these groups. Jewellery is more complicated as we have decorated our bodies for millenia with beautiful and artistic gold, but I am sure the price does factor into the appeal for many who enjoy wearing a gold Rolex or Cartier necklace.

Using the WGC figures I calculate a market cap of gold around $12 trillion, which is staggering. It is understandable though as the market is very mature and institutions are very much acquainted with its role in portfolios. Now, take Bitcoin which currently has a market cap of just over $1 trillon and as we have discussed shares the properties of gold which makes it a store of value  and you can understand the motivation of some investors.

Bitcoin Price Predictions

Are we in a bubble?  Perhaps.
Will we experience a 90% drawdown on price similar to 2017?  Possibly. But as a crypto investor, I hope not!
Will we see the prophetic claims of $250,000 per Bitcoin become reality?  Who knows?

Apart from the obvious accuracy of my predictions, the point here is that we have little to go off and realistically, Bitcoin remains a speculative asset in my opinion. There is promise to function as a currency and store of value at some future time. For now, it is too volatile to be considered with price swings capable of knocking out your entire life savings. Anyone who attempts to lure you in on guaranteed high returns, Lamborghinis and a harbour-side apartment in Monaco should be dismissed as a purveyor of snake oil. For any readers getting defensive of cryptocurrency at this point, I would say the same for any asset including that of gold. No one is a fortune teller and there is a real risk of losing capital!

That said, we can discuss properties of Bitcoin that make it an interesting asset to the backdrop of economic doom-and-gloom and why, in an era of perennial money trees, gold may not be the only safe haven in which to find solace. On balance, Bitcoin is not a perfect instrument either and I can discuss my views here too….

Benefits of Gold and Bitcoin

Bitcoin is a hard-digital asset with a finite cap on supply. There are around 18 million already mined from a total 21 million with the final one due to be mined in 2140, as dictated in the source code. Contrast this first to gold which can be mined as higher prices make deeper deposits more economical to extract, and then to fiat currencies which are currently being printed into oblivion. The increase in supply of both gold and currency can dampen prices and reduce purchasing power. It is not that new Bitcoin cannot be mined, it is that a change to the existing open source protocol would have to be approved by 95% of the miners in the world and then accepted by the community at large. In addition to the 'voting' system, any attempt to force a protocol change that devalues Bitcoin (by increasing supply) would unlikely be accepted on economic grounds, reflecting the power of the individual in the network.

Those who read industry news may be aware of an alpha male race to a nearby asteroid with Jeff Bezos (Amazon/Blue Origin) and Elon Musk (Tesla/SpaceX) leading the charge. If a quintillion ounces of gold are actually found in the nearby solar system, we could see gold price slashed by the tidal wave of supply. This is pure speculation and assumes we don’t destroy civilisation before achieving this amazing scientific feat, but it is to make the point that once all of the Bitcoins are mined, none can be added or removed ‘ad infinitum’. In an interesting point, if we do destroy civilisation and power networks and the internet fails where does this leave Bitcoin? Bitcoin can only survive in a digital age whereas gold is a timeless physical asset.

Both gold and Bitcoin have no third-party risk, and you have sovereignty over your wealth. Both satisfy the libertarian ideal that no corporation or government has claim or influence over your money. One only needs to look at the ability for banks to freeze your account, quite often for legitimate transactions, to feel compelled to remove your wealth from the system. We see this daily as customers try to pay us for sums as “small” as £10,000!

The Gold and Bitcoin Hedge

In a world of quantitative easing, institutional investors and the public are looking for ways to climb outside of the system of fiat-based instruments. Equities and bonds look unlikely to make major returns over the medium to long term and you may even experience a loss of purchasing power upon disposal as returns remain below the rate of monetary expansion. “M2” money supply (includes cash, current account deposits, and easily convertible near money) can be used as a measure of monetary expansion has gone into overdrive since March 2020 increasing approximately by 20% in the UK and 40% in the US. Policy makers hope (I think) to reduce this over time, either way the money supply is expanding and diluting the value of currencies. This leaves gold and bitcoin as the only real options as a financial hedge.

Bitcoin can be transmitted anywhere in the world and stored at low cost which is of huge interest to financial institutions. If you are comfortable with third-party storage of gold, you can open digital metal accounts, such as our DigitAul products, and carry out low-cost transactions in a similar manner. Your choice will ultimately depend on your societal outlook, trust in well established companies like us [Chards], your risk appetite and desire to diversify.

Bitcoin appears to be resistant to forgery (as far as I know) and has stood the test against thousands of other coins to remain king of the crypto space, be it for its short lifespan of only 13 years. Gold coins and bars on the other hand, can be counterfeited, although we are skilled enough at filtering these at the point of buy-in. Will we see counterfeit Bitcoins or transactions on the blockchain? I am not technical enough to answer this but understand a concentration of wealth or a collusion of Bitcoin miners could potentially result in corruption. The vast majority of Bitcoin mining operations are in China and this concentration risk could give rise to collusion and market manipulation, as could big players in the market. On the latter point, the same can be said of any investors with enormous holdings (a.k.a. whales) in any market.

Imperfections

For now, Bitcoin remains incorruptible, but the network and its usability is fraught with technical hurdles and fraud. Painfully, more regulation is likely needed to protect those using the network who possess limited technical understanding of what is actually going on. Increasing regulation however, will continue to erode at the original core ideals of Bitcoin, that of freedom, sovereignty, anonymity and empowerment of the people.

Furthermore, if you carry around your entire life saving on what is essentially a USB-stick you could quite easily lose your wealth in the pub, at the beach or at the supermarket! Gold might be more difficult to lose due to its size and physical volume, but due to its physical nature requires vaulted storage otherwise is easily stolen. Bitcoin on the other hand, assuming you are tech savvy and basic hardware wallet security is implemented for £70, is more difficult to steal. It is thought somewhere in the region of 20% of all Bitcoins are ‘lost’ on the network with owners locked out of accounts and unable to access the coins. All through losing secret keys, passwords, wallets or terrible planning of estates at the time of perhaps an untimely death.

The volatility of the market is also a concern for anyone who may need access to funds in the short or medium term. For those entering the market the next few years could be a bear market and if you are not willing to ride out any storm it is likely a speculative asset is not for you.

Pseudo-anonymity

Bitcoin and many other crypto assets have an issue in that they are not truly anonymous, and transactions can be chased up the blockchain. What I mean here is that if you release your public wallet addresses potentially all the transactions you carry out could be visible if someone traces the address to you. You can remain anonymous if no one is ever able to physically link a wallet address to you, either through direct association or by backtracking through transaction records on the blockchain. Not only that but exchanges also have all your details should the police or tax authorities demand it is handed over. They are not above the law and any attempt in the industry to cause anarchy will be met with staunch resistance by governments. For example, if HMRC or the police make a legal request that we cannot contest, we are obligated by law to provide information we hold on you as are the exchanges. Accepting trade-offs to the original ideal is the only way these empowering assets are going to hit the mainstream.

credit: pixabay

Some sceptics claim there is a backdoor to the algorithm, or that Satoshi has some grand plan that he has been impeccable in cloaking from the masses. I for one am not technically savvy enough to poke holes in this theory and happy to accept the community has been unable to find one...for now.

Where Can I Buy Gold and/or Bitcoin

For those customers who read this page and conclude that a physical asset is the right choice for their investment needs then we have you covered as a leading UK bullion dealer. We offer everything from CGT-exempt coins, VAT free silver with overseas storage as well as a large range of collectable and numismatic coins.

On the other hand, if you wish to buy Bitcoin (or other crypto assets) we would like to suggest our partners Coinpass Ltd who are a UK based exchange on the full register of FCA approved crypto asset businesses. You can visit www.coinpass.com to sign up for an account.

Conclusion

There is much more to discuss on this topic, but I will leave it there for today. For me, gold remains a fundamental part of wealth preservation and the perfect asset to lock in profits acquired through more speculative investments. You are unlikely to lose 60% plus of your net worth overnight by holding gold which cannot be said for cryptocurrency. Gold is a recognisable medium all over the globe from the outer edges of Siberia to the depths of the Sahara where people will recognise gold's value and be able to trade. I am not sure a nomadic tribe will feel the same way about a Trezor or a seed phrase, nor are they likely to know how to spend or use it. That, and any lack of electricity or the internet puts up another immediate barrier.

My conclusion at the end of 2021 is that Bitcoin is an incredibly exciting asset and potentially has a long-term role to play in protecting wealth as a safe haven asset. For now, Bitcoin needs to get through this rampant phase of price discovery and stabilise in price. Regulation needs to continue pushing forward to protect the masses from fraud, and governments need to get to grips with taxing fiat (or central bank digital currency ‘CBDC’) on-and-off ramps.

 

Chards in 2022

What crypto services are on offer at Chards?

We are able to accept crypto as a form of payment and also offer a customer custody solution.

Are we taking a Bitcoin position? 

For now, no.

Do we think Bitcoin will replace gold?

 I would give this a firm no.

Can Bitcoin co-exist with gold as a safe haven and store of value? 

This is the most likely outcome of the debate, in my opinion of course.

A Chards Future Product Perhaps?

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