Rethinking The Bitcoin-Gold Comparison

Digital currencies are a rapidly growing asset class and bitcoin is the primary driver of that growth. Bitcoin has been compared to gold during its meteoric rise, but some market participants believe the cryptocurrency has a long way to go before comparisons to bullion are relevant.

One of the obvious sticking points comes from the world of exchange traded funds. U.S. regulators have yet to approve ETFs related to bitcoin — or any cryptocurrencies for that matter. Earlier this year, the Securities and Exchange Commission forced several ETF sponsors to scuttle applications for bitcoin-related ETFs.

On the other hand, the SPDR Gold Shares GLD, is the 20th-largest U.S.-listed ETF and has $35.4 billion in assets under management. The iShares Gold Trust IAU is home to $11.2 billion in assets.

There's an age factor as well: bitcoin has only been part of the investment lexicon since 2009. By some estimates, gold has been part of human history for 6,000 years.

A Long Road Ahead

Gold has a lengthy head start on digital currencies when it comes to relevancy in the international monetary system. On a large scale, gold is bought and sold by many of the world's largest central banks. Bullion is also a favored asset among many retail investors who are looking for ways to diversify portfolios away from bonds and equities or those looking to guard against inflation. Bitcoin has yet to develop a significant reputation on those fronts.

“Bitcoin was the first cryptocurrency developed and it only emerged on the scene as recently as 2009,” said George Milling-Stanley, head of gold strategy at State Street Global Advisors in a Tuesday note. “Until bitcoin has demonstrated over time that it can effectively transfer and preserve wealth, I don’t think it’s responsible to call it Gold 2.0.”

SSgA, the third-largest U.S. ETF issuer, markets GLD.

Concerns And Similarities

Cryptocurrencies are volatile, making the asset class difficult to deploy in portfolios for many advisors and investors. Not only are digital currencies speculative, but the accessibility of cryptos is difficult for many investors relative to ETFs such as GLD and IAU. Yet there are similarities shared by bitcoin and gold.

For example, neither is controlled by a central bank in the way the dollar is supposedly controlled by the Federal Reserve.

“The other similarity is scarce supply. Bitcoin is engineered to slowly decline to zero growth around the year 2140, where it will reach maximum capacity of 21 million digital coins,” said Milling-Stanley. “Gold doesn’t have a set date or maximum capacity, but on average approximately 3,200 tonnes of gold have been mined every year, adding about 1.7 percent of the total stock of gold ever mined.”

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Disclosure: The author owns shares of IAU.