Views From The Experts
Trey Reik
Senior Portfolio Manager
Sprott Asset Management
Gold Versus Bitcoin As Store Of Value
A highlight of 2017 financial markets has been the explosion of interest in cryptocurrencies. The price performance of bitcoin and its crypto brethren has been nothing short of spectacular, leading to speculation that bitcoin has usurped gold’s role as “store of value.” While interest in cryptocurrencies can be linked to issues motivating gold investors, such as resentment over financially repressive policies of global central banks, the investment merits of bitcoin and gold bullion could hardly be more different. While gold continues to function as a reliable store of value and productive portfoliodiversifying asset, bitcoin’s investment merit is best categorized as potent speculation.
Unlike gold’s 5,000 years of history, bitcoin is an idea in its early infancy. Just as Netscape was once the undisputed market-leading browser in an emerging technology called the internet, bitcoin is now the undisputed market-leading crypto in an emerging technology called the blockchain. It is far too early for definitive evaluation of bitcoin’s long-term prospects. Further, an ounce of gold is always an ounce of gold, with no variation. Bitcoin, in comparison, is a string of code generated by software protocols and cryptographic algorithms. While physical bullion is generally stored in safe deposit boxes or bank vaults, bitcoin storage methods still involve a wide range of internet-type vulnerabilities.
While bitcoin may represent an attractive portfolio diversifier for individual investors, its tiny market capitalization ($70 billion) cannot compete with gold’s above ground stock ($8 trillion) as an institutional option for accumulated wealth. Finally, while the blockchain’s distributed ledger technology empowers sufficient trust for parties to flip around bitcoins to one another, bitcoin will never be a conduit for serious wealth until an element of institutional trust and oversight is introduced.
In short, bitcoin and crypto currencies are a fascinating development with far-reaching implications for the global payment system. Digital currencies offer freedom from traditional payment systems such as banks and credit cards, which charge high fees and are increasingly hacked. And, of course, cryptocurrencies have generated tens-of-billions-of-dollars-worth of trading profits, in a very short period, for a growing list of speculators. It is still far too early, however, to assess survival probabilities for any cryptocurrencies, much less compare them to gold as a store of value.
Sprott is a global asset manager providing investors with access to highly-differentiated precious metal and real asset investment strategies. As a specialist, our depth of knowledge, experience and relationships separates us from generalists. Our best-in-class products include innovative physical bullion trusts, mining ETFs, and private equity and debt strategies. We also partner with natural resource companies to meet their capital needs through our merchant banking and resource lending activities. Sprott is based in Toronto with offices in New York, Carlsbad and Vancouver and its common shares are listed on the Toronto Stock Exchange under the symbol TSX:SII.