, September 25, 2021

Is Bitcoin on the verge of supplanting gold as a store of value?


  •   3 min reads
Is Bitcoin on the verge of supplanting gold as a store of value?

New data reveals a surge in interest in Bitcoin on the futures market, but is Bitcoin really close to supplanting gold as the preferred store of value?

It had never occurred to me before this point, but instead of buying my wife something made of gold, why not buy her something made of Bitcoin? Okay, I admit, I am being facetious. But this is, of course, the reason why traditionalists don't rate Bitcoin. You can't see it, touch it, smell it, and you most certainly can't wear it. But then we live in the digital era. You can meet people without anyone going out. You can do your shopping without leaving your bed. In such circumstances, why would anyone think that an investment asset has to be something physical?  And that, in a nutshell, is why Bitcoin's supporters believe it can replace gold as a store of value.

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In any case, say Bitcoin's supporters, the cryptocurrency is backed by something physical. It takes electricity to charge the computers used to mine Bitcoins, and to generate electricity you need something physical. Ergo they say, Bitcoin is just like gold, it has real value defined by the cost of mining it and because of its rarity.

There is an odd contradiction that creeps into the Bitcoin narrative at this point.  Critics talk about the massive amount of energy required to mine Bitcoins and thus its carbon footprint. Its supporters retort that the cryptocurrency's carbon footprint can be reduced by using sustainable sources of energy that are cheap — such as tapping into Iceland's thermal energy. But if the Bitcoin defence rests on the argument that mining it isn't that expensive, doesn't that contradict the argument that suggests Bitcoin is comparable to gold because it is generated by something physical? Remember, gold and, unlike Bitcoin, was created by nature — it would exist without human endeavour. The purpose of gold mining is to find gold, while Bitcoin mining aims to generate Bitcoins.

It also seems to this writer that either Bitcoin is comparable to gold as mining it extracts a high cost, or it isn't comparable to gold because mining it can be quite cheap.  

Let's set aside that rather inconvenient apparent contradiction in terms.

According to Data calculated by Finbold, in the first three months of this year, Bitcoin futures open interest on various exchanges, grew by 133.74 per cent.

Why? Finbold suggests, quite reasonably, that the spike in Bitcoin futures open interest reflects the surge in the asset's price, initiated mainly by the entry of institutional investors into the sector.

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And maybe the surge in Bitcoin trading on futures markets is evidence that  "institutions from traditional finance are considering adding more Bitcoin exposure to their portfolios," suggests the Finbold report.

Meanwhile, over the same period, gold futures open interest dropped 17.54 per cent.

To surmise, in the world of futures open interest, and during the first quarter of 2021, Bitcoin was up 134 per cent, and gold was down 18 per cent.

"The growth in Bitcoin open futures offers validation for cryptocurrency supporters to believe the asset will eventually replace gold as the store of value," said Finbold.

But there is a snag, which Finbold pointed out.
The total value of futures open interest in Bitcoin came in at $22.58 billion in March compared to $95.8 billion for gold.  

Instead of replacing gold as a store of value, Bitcoin, assuming it really does prove to have longevity, is more likely to emerge as just another asset, forming part of a diversified portfolio.

Image credit:  Bitcoin

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