As the fiscal position of the United States continues to deteriorate at the same time that foreign countries are scaling back on their purchases of U.S. Treasuries, many investors are rightly worried about where they can hide from a potential decline in the value of the dollar and are looking to invest in a reliable “store of value.”
A store of value is an asset which can be stored and reliably retrieved at a later time with its purchasing power intact. Some investors seeking this protection prefer gold, and some prefer bitcoin. Some even prefer both gold and bitcoin.
Unlike the stock market, bonds, and real estate, gold and bitcoin share several features in common. Neither generates any income. Both are perceived to exist in limited supply. Both are purchased by investors who are worried about depreciating fiat currencies. But as a store of value, gold is much more likely to be the superior option over the next five to ten years for the following reasons:
- Properties: Gold is tangible, transportable, and can be purchased or sold anonymously. As a precious metal, gold has unique properties due to its rarity, its durability, its fungibility, its beauty, its resistance to corrosion, its divisibility, and its malleability. Gold is easy to hide and store in any number of places, and it is a highly liquid asset. While the threat of gold theft certainly is a risk, losing one’s gold is difficult, and losing one’s gold to a hacker is impossible. Unlike gold, bitcoin is not tangible, and, for that reason, it can be sent across the world seamlessly and inexpensively. It can be purchased or sold anonymously through decentralized transactions that require no intermediary. Like gold, bitcoin is also fungible and divisible. However, it is possible to lose one’s bitcoin by losing the private key of a bitcoin storage address. Bitcoin can also be stolen by hackers, particularly if bitcoin is stored in an exchange. Indeed, epic stories exist where bitcoin holders have lost millions of dollars worth of bitcoin due to ineptitude or hackers or both. Just recently, Gerald Cotten, CEO of QuadrigaCX, died with the passwords of 115,000 investors worth an estimated $140 million in cryptocurrencies.
- Limited Supply: Gold’s supply is limited, supporting its role as a store of value. The worldwide supply of gold increases by about 1.5% each year. Gold’s unique properties, mentioned above, make gold a superior store of value compared to other precious metals such as silver, palladium, and platinum. Gold has emerged as the clear winner store of value after thousands of years of competition against other commodity currencies. A futures market for gold exists, which increases the supply of paper gold, but futures can be settled with physical gold, limiting the extent to which the futures market can influence the physical gold price over the long-term. Bitcoin’s supply increases are also limited, in theory, but bitcoin can be “forked” by dissatisfied bitcoin developers. A fork is a point of divergence in the blockchain, and at its most extreme can lead to a permanent split of one currency into two. Thus far, bitcoin has begotten multiple children including bitcoin cash and bitcoin gold, and other forks could take place in the future. Besides the possibility of a series of future forks for bitcoin itself, a seemingly endless supply of new cryptocurrencies has been launched in the last couple of years, any one of which could eventually replace bitcoin as investors’ favorite cryptocurrency. Unlike gold, bitcoin has not endured thousands of years of competition against other cryptocurrencies. Finally, a cash-settled futures market for bitcoin has been launched, which means that a limitless supply of fiat bitcoin can be created by futures market participants.
- History and Stability: Gold has been used as a store of value for thousands of years. Since Roman times, the purchasing power of gold has been stable enough that people say an ounce of gold can always be used to purchase a good suit. While one might argue about the definition of what a “good suit” is, the idea behind this adage is that the purchasing power of gold has remained constant over a long period. Barring discovery of an enormous deposit on Mars, gold’s purchasing power should not change significantly. Meanwhile, bitcoin investors are, for the most part, investing in technological disruption. Bitcoin investors are hoping for fantastic profits, expecting that bitcoin will supplant gold and the U.S. dollar as the world’s pre-eminent monetary asset. If bitcoin bulls are correct, bitcoin will indeed generate fantastic returns. However, this investment thesis makes bitcoin a speculative asset rather than a store of value, which is why bitcoin’s price went up in price by 1,331% in 2017 only to go down by 72% during 2018. While bitcoin might be a profitable investment in the long-term, bitcoin’s price is just too volatile to reliably serve as a store of value.
- Official Support: Central banks and governments across the world own gold as a reserve asset. Moreover, since the Financial Crisis, central banks and governments have been buying more gold in order to diversify their currency reserves and reduce their reliance upon the U.S. dollar as a reserve asset. Central bank gold purchasing has accelerated recently, which suggests that the use of gold as a settlement asset among countries is likely to increase in coming years. If central banks are buying gold because they believe gold can serve as a store of value, why should investors act differently? Meanwhile, central banks and governments do not own any bitcoins or any other decentralized cryptocurrency. Indeed, the bitcoin bull case assumes that bitcoin usage will destroy central banks and the banking system. Because bitcoin operates perfectly well without any central authority, even the IMF has acknowledged that crypto assets represent a potential threat to central bank money. In response, central banks have been considering the introduction of central bank-issued cryptocurrencies, such as FedCoin. It seems impossible that central banks would buy or hold a cryptocurrency that central banks would not issue and control themselves.
While bitcoin may be an attractive opportunity for some investors, it should not be considered a reliable store of value in your portfolio. With bitcoin, you should only invest what you are prepared to lose if the bitcoin price should go to zero. If bitcoin does not succeed in supplanting gold as a store of value, bitcoin is likely to have little to no value whatsoever. This warning alone prevents bitcoin from being considered a store of value.
Meanwhile, gold does not appear to be going anywhere right now except into the vaults of foreign central banks. With the U.S. dollar likely to depreciate in the coming five to ten years, the dollar-denominated gold price would likely appreciate accordingly. For multiple reasons, gold deserves a place as a reliable and liquid store of value in most people’s investment portfolio.