Gold vs Bitcoin – the battle continues

Three reasons gold investors shouldn’t fear Bitcoin!

Bitcoin was first launched almost 15 years ago, in the aftermath of the Global Financial Crisis.

Marketed as “digital gold”, or “gold 2.0”, it has seen a meteoric price rise since inception (and many crashes along the way), with some Bitcoin evangelists arguing that the cryptocurrency has disrupted the gold market, and will continue to take market share from gold in the years to come.

Believers in this hypothesis will point to things like gold’s stagnant price in USD terms since 2011 (some have called it a “lost decade” for gold) as proof Bitcoin is taking over from gold as the world’s premiere hard currency and inflation hedge.

They also tend to highlight how popular cryptocurrencies are among younger investors, noting that there will be a huge wealth transfer (measured in the tens of trillions of dollars) from the Silent Generation and Baby Boomers to Millennials in the years to come.

This blog highlights three specific reasons why we don’t believe gold is being replaced by Bitcoin, despite what cryptocurrencies advocates might say.

Gold’s “lost decade” has nothing to do with Bitcoin

Yes, the gold price is largely unchanged since late 2011, when it first traded near USD $1,900 per troy ounce. While the returns over the last ten years may have disappointed some investors, it needs to be remembered that gold had risen from below USD $300 per troy ounce at the start of the year 2000.

Gold was also the most popular choice amongst retail investors as to which was the best long-term investment back in 2011.

In simple terms, gold needed to go through a corrective price cycle, which is exactly what happened in the ten year “lost decade” for gold from 2011 onward.

It’s also worth noting that that time period, up until the COVID pandemic hit, was also characterised by

• One of the longest equity market bull runs on record

• One of the longest periods of uninterrupted economic growth on record

• The lowest ten-year period of official inflation increases in decades

• An unprecedented collapse in commodity prices

So, while gold’s “lost decade” coincided with the birth of Bitcoin and crypto-markets, there is scant evidence of any link between the latter and the former.
There are two final relevant comments regarding gold’s “lost decade”.

The first is that all of the gold price drop had occurred by the end of 2015, with the USD gold price some 70% higher than it was back then. The second is that the “lost decade” is predominantly a USD gold price story, with the precious metal performing far better in a range of other currencies, including Australian dollars, over this time period.

The young get old

It is no surprise Bitcoin is particularly popular with millennial and younger investors. That is after all the generation that is happy to take huge risks with their wealth, largely because (and this is no fault of theirs) they haven’t accumulated much of it to date.

They also don’t yet tend to be married, or have kids, and their parents are some years away from potentially needing access to aged care facilities and the like
In short, their lives are long on freedom, and short on responsibility.

This is not a critique by the way, indeed it’s one of the reasons why I for one, and I suspect so many people, look back fondly on their early adult years.

But this generation will grow up, they will have kids, they will get day-care bills, they’ll worry about how to look after their folks as they age, they’ll want to save for retirement etc.
It’s easy to go “all-in” on crypto when you are 22 years old with a $5,000 portfolio. It’s a totally different story 10 or 20 years later.

As such, their affinity for Bitcoin, and the potentially negative lens that they view gold through will likely change over time, with the fact that so many millennials will have actually lost money in crypto in the price crash of 2022 only reinforcing this view.

Bitcoin is tiny

Bitcoin remains a tiny asset class. Yes, the returns have been spectacular, but that’s because those returns started from nothing in terms of market size.

To view how largely insignificant Bitcoin is in the context of the gold market, consider the chart below, which runs from the end of 2010 to end June 2022.

The chart combines the size of the gold and Bitcoin market together and shows the percentage of that market that each asset contributes.

Note that for 2022, we’ve assumed gold mining production equals 1,657 tonnes in the first 6 months of the year, a sum equal to half the annual average gold production seen globally since 2010.

Chart: Market share – gold vs bitcoin as percentage of both markets combined 2010 to 2022

Source: ABC Bullion, London Bullion Market Association, World Gold Council, Coinmetrics

Even at its peak relative to gold, Bitcoin made up less than 7% of the total share of both assets. Since 2010, Bitcoin has averaged well below 2% of the share of the two asset classes combined.

Indeed, since Bitcoin was “born”, gold’s market value has increased by the better part of USD $4.5 trillion dollars. That’s more than 12 times all the value growth that Bitcoin has displayed since inception.

As a final way of considering how tiny Bitcoin is relative to gold, it’s worth noting that the gold market is so large in terms of market value, that each and every citizen on planet earth could invest just over USD $1,500 into gold if they wanted to today. That’s equivalent to 0.83 of a troy ounce of gold based on the end June 2022 USD gold price.

By comparison, Bitcoin is so tiny that if citizen on earth wanted to own some, they’d each be able to put less than USD $50 into it at end June prices.

Given these differences, comparing Bitcoin to gold is like comparing a speed boat to a supertanker, or a start-up fintech company to Australia’s big 4 banks combined.

Conclusion

Combined, the issues highlighted above suggest that Bitcoin, and indeed the broader cryptocurrency movement, has not stolen market share from gold since it was launched.
The data also suggests that Bitcoin does not represent any meaningful threat at this stage to the bright future in store for gold.

Warm regards,

The ABC Bullion Team

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