05.12.2017

Gold or Bitcoin? Part 2

by Lantern Fund Forum 2017

Read the first part of this article

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The graph shows the trend of the bitcoin in the last two months, a rise that has led to its value doubling in the short space of sixty days. We can also note a rapid fall, of over 20%, in the first ten days of November, then recovered just a few days later.

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This aspect regards volatility and prevents the bitcoin, at least at this early stage of its life, from being suitable for investment (we have discussed diversification and investment in the article Gold or Bitcoins?).

Are gold and bitcoins a means of payment?

The high level of volatility, which will tend to come down sooner or later, considerably limits the possibility of using the bitcoin as a means of payment and generally relegates it to small amounts, as for large amounts its use could be limited to the need for anonymity. In any case, these payments would require to be immediately converted into a cash currency, precisely because the price is so variable.

Imagine you want to buy a car or a house using bitcoins and therefore procure the cryptocurrency in time. What would happen to your purchasing power if, just when you need to pay the relative balance, you encounter one of the occasional double figure drops?

Obviously, you will choose a different means of payment and, even if you are obliged to make a payment in bitcoins, you will do so by converting your currency into bitcoins literally moments before you make the digital transaction.

Now let us imagine another situation, that of a power blackout; it may seem a rather extreme scenario but it is a perfectly plausible one, which indeed happened just a few months ago in the Caribbean and in extensive areas of the southern United States struck by hurricanes. Holding bitcoins, even on a pen drive, would make them rather difficult to spend, and we should remember that it is precisely in times like these that people need to meet unexpected expenses.

From this point of view, gold appears to work better, despite the restrictions linked to its safekeeping and transportation, as it is a physical asset.

Gold and bitcoins: a winning partnership

The uncertainties of the monetary system mean that bitcoins and cryptocurrencies will be used increasingly in the future, especially once the regulatory bodies have found a way to eradicate anonymity, charging the exchanges with anti-money laundering responsibility.

Once their volatility has settled down, bitcoins could even become a widely used means of payment, but very probably they will always require support as a store of value.

To this end, the optimum use could be generated by gold, by converting investment bitcoins into gold and so avoiding having to resort to fiat money, that is, printable money that could also be subject to the erosion of the purchasing power (see also the article Gold or Bitcoins? Part 1).

Gold can perform the natural ferrying task from the virtual world of the Internet and the blockchain to the real world of real goods.

And while there is no doubt that the cryptocurrencies will be the future, it is just as sure that gold will continue to play the same role it has played from the birth of civilisation to the present age, living through wars, riots and famines intact.

In an ideal world, fiat money could instead constitute a secular parenthesis of a reckless management of money.

Read the first part of this article

Maurizio Mazziero consultant partner of pro aurum

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