Bitcoin is 'too volatile to replace gold', claims World Gold Council

Bitcoin and other cryptocurrencies are to unstable to be substitutes for gold, the World Gold Council has declared.

Some financial experts and commentators have claimed that digital currencies like bitcoin could, like gold, become a safe investment in the future, but a new report from the World Gold Council argues that they are very different.

Gold is less volatile than cryptocurrencies, and its purpose as an investment is much clearer, the report claimed.

“In our view, bitcoin and cryptocurrencies more generally are not a substitute for gold,” it said.

“Gold is a tried and tested effective investment tool in portfolios. It has been a source of returns rivalling that of the stock market over various time horizons; it has performed well during periods of inflation; it has been a highly liquid, established market; and it has acted as an important portfolio diversifier, exemplifying negative correlation to the market during downturns.”

Bitcoin’s price, which skyrocketed in 2017 thanks largely to speculation, “seems to be driven by high return expectations”, the report stated.

The cryptocurrency hit a record high when it passed $19,850 (£13,980) in mid-December, but then tumbled rapidly, falling to below $12,000 within days. Its value has shifted unpredictably ever since, with frequent wild drops and recoveries.

Gold will remain a mainstream financial asset because it is less volatile than digital currencies, has a more liquid market and a well-understood role in an investment portfolio, and trades in an established regulatory framework, the World Gold Council added.

Bitcoin, meanwhile, is facing a crackdown in numerous countries around the world.

South Korea recently introduced new digital currency trading regulation, which sent bitcoin’s price plummeting. The UK, US, Germany and France have hinted that they could take a similar stance.

However, the World Gold Council said it believed cryptocurrencies still “may become an established part of the financial system”.

“The sources of demand for gold are very different from cryptocurrencies. Gold has a 7,000-year history as an asset and a long-standing role as money. It is owned by central banks, as well as institutional and retail investors,” the organisation’s report continued.

“Yet, it also has a large and diverse attraction as jewellery, which remains the largest source of demand – typically representing between 50% and 60% of annual demand over the past 20 years … also, gold is a tangible good, with real technical applications – gold is even used in the computer chips that ‘mine’ bitcoin.

“In contrast, bitcoin and other cryptocurrencies are designed to be used as tokens in electronic payment systems. These may have potentially useful characteristics. For now, however, the opportunities to spend bitcoin are rather limited, and genuine transactions are quickly converted into fiat currencies due to bitcoin’s price volatility.”

Stripe recently announced it was ending support for payments made in bitcoin. The company had hoped the cryptocurrency would become “a universal, decentralized substrate for online transactions”, but said it was now “better-suited to being an asset than being a means of exchange”, and that “there are fewer and fewer cases for which accepting or paying with bitcoin makes sense” because its value fluctuates so much.

“Another factor to consider is competition within cryptocurrencies themselves,” the report added. “There are currently over 1,400 cryptocurrencies available and, while bitcoin is the largest by far, new technology could have devastating effects on the value and supply of any of the cryptocurrencies, including bitcoin.”

It is little surprise that the World Gold Council feels this way, but the outlook has gained support from financial experts.

“Those looking for similarities between bitcoin and gold can of course find them. The main difference between the two however lies in the volatility,” Carlo Alberto De Casa, chief analyst at online broker ActivTrades, told The Independent.

“Gold is often seen as the most popular of the commodities because it is a safe haven, more practically it is revered for its hedging properties. Its inelastic supply is just one reason it remains resilient to external market shocks.

“Bitcoin behaves nothing like this. After an astonishing 2017, bitcoin has sharply fallen in the last six weeks, losing 50 per cent of its value from its peak.”

However, Nikolay Storonsky, the CEO of digital banking firm Revolut, sees a lot more promise in digital currencies.

“Cryptocurrencies’ volatility is partly driven by the huge demand, regulatory uncertainty and the influx of new funds flowing into the market – users want and are craving alternative investment opportunities,” he said.

“Globally, regulators are beginning to take action due to the huge growth and consumer demand. Many governments have, or are, rolling out regulatory frameworks – check out Gibraltar’s new regulation and DLT framework as a recent example – and others are actively seeking partnerships, advice and trailing new approaches.”

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