Gold has been around for longer than fiat currency, let alone stock exchanges and blockchain. Over the centuries, it has proven its value time and again as it shrugged off wars, catastrophes and the ravages of inflation to become a firm favourite of long-term savers and a crucial hedge in investment portfolios. Now, as the blockchain revolution seeks to challenge fiat money as the world’s preferred trading coin, gold is arguably the model which major cryptocurrencies such as Bitcoin are looking to, with their automatically-limited creation process - which they even call ‘mining’. Given its easy availability and potential for trading and shopping, investors may be tempted to consider crypto as an alternative to gold. However, there remain compelling reasons to stick with the yellow metal which served our ancestors so well:
1. Gold holds its value. Technically, gold is best seen as a store of value rather than an investment, which implies profits and return. Gold simply holds its worth as currencies tumble: the US dollar has lost approximately 97% of its purchasing power in relation to gold in the 47 years since the United States abandoned the gold standard in 1971.
2. It’s a great hedge. Even many people who prefer to put their money into stocks to seek inflation-busting growth hold some gold as protection against the stock market’s inherent volatility. They know that when the whole market takes a dive, even their most carefully chosen stocks will fall too, but gold will appreciate as money seeks a safe haven. This is exactly what happened in 2008.
3. Gold remains a great unit of account. Most goods continue to be priced in fiat money, but it is essential to consider inflation when looking at even medium-term timescales. When inflation gets out of hand, or currencies themselves are being measured, gold is often reverted to. It remains a reassuringly stable international unit of account and this helps underpin its value.
4. Crypto is just too volatile. The huge gains delivered by cryptocurrencies such as Bitcoin, Litecoin and Ethereum in 2017 in particular were great for anyone who was holding them at the time. But the bull run and subsequent partial retreat means no-one knows where these currencies are going next. What we do know is that they are far too volatile to be considered as stores of value or units of account right now.
5. Gold stands to benefit from blockchain. Whereas fiat currency is being challenged by the crypto revolution, gold stands to benefit, because in a world with literally thousands of easily traded digital currencies, a guarantee of value and unit of account is needed. Already companies such as Aurus are looking to tokenise gold, and cryptocurrency traders themselves will likely use this as a store of value. Additionally, with tokenisation gold could finally emerge as a viable medium for exchange.
Read more by Alexi Flanders | Aurus.io