Cryptocurrencies like bitcoins are no substitute for gold as the latter is a tried and tested effective investment tool in portfolios, according to the World Gold Council (WGC). Cryptocurrencies may become an established part of the financial system, but gold’s role as a mainstream financial asset will likely continue to resonate in today’s digital world, it said in a latest report.
The cryptocurrency market has been estimated at over USD 800 billion. Bitcoin, the most widely recognised cryptocurrency, has had rapid price growth over the past few years – increasing 13-fold in 2017 alone, it added. "Some commentators went as far as to claim that cryptocurrencies could replace gold...But, in our view, gold is very different from cryptocurrencies," the report said.
Gold, which has a well understood role in an investment portfolio, is less volatile, has a more liquid market, traded in an established regulatory framework and has little overlap with cryptocurrencies on sources of demand/supply, it added.
The WGC also said, "there isn't any quantifiable evidence that gold holdings are directly suffering from competition from cryptocurrencies." The level of gold price in 2017 appears to be consistent with drivers of the past few years and is showing no signs of suffering from crypto-competition, it said in the report. Unlike gold, cryptocurrencies do not have a clear two-way market. "Reports suggest their volume is driven by buy-and- hold investors, but, so far, they lack the characteristics common to most liquid markets with the ability to short/large quantities," the WGC report said.
In addition, anecdotal evidence suggests there are high transaction costs for selling positions – both in monetary terms and in the time it takes for the transaction to settle. "Despite the current size of the cryptocurrency market, which is estimated at over USD 800 billion, volumes are very low compared to gold and other currencies," the report said.
Bitcoin trades USD 2 billion, on average, a day, which is roughly equivalent to the world daily trading volume of gold- backed exchange-traded funds (ETFs). This volume however is less than 1 per cent of the total gold market that trades approximately USD 250 billion a day. Stating that the gold demand is diverse unlike cryptocurrencies, the WGC report said the yellow metal has a 7,000-year history as an asset and a long-standing role as money. It is owned by central banks, institutional and retail investors.
Yet, it also has a large and diverse attraction as jewellery, which remains the largest source of demand – typically representing 50-60 per cent of annual demand over the past 20 years, it said.
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." The WGC report further said gold is less volatile when compared with cryptocurrencies.
Gold prices had increased rapidly in the late 1970s but its price volatility has been relatively tame over the past four decades.
Bitcoin's price has also been extremely volatile –some 10 times that of the dollar denominated gold price. However, its high volatility was evidenced by the sharp price correction it has experienced since mid-December 2017 –falling by more than 40 per cent in a month, it said.
Moreover, trade in gold is widely authorised and regulated in many markets, the WGC report noted. "Cryptocurrencies are broadly permitted, and most countries have deferred granting them approval, while not banning them – although there are a few outliers at both extremes – Japan appears to have granted approval, and China has greatly restricted their use," it said.
WGC also mentioned that some commentators have suggested bitcoin and other cryptocurrencies are at great risk of sudden restrictions from countries concerned about capital flight, investor protection, or loss of seigniorage. For example, South Korea - one of the world's largest cryptocurrency markets - has announced more regulatory measures. And in the UK, investors are facing hurdles to convert cryptocurrencies, it added.