Thursday 22 February 2018

Cryptocurrencies glitter but they're still not gold, report argues

Ellie Donnelly

Ellie Donnelly

Gold holdings are not directly suffering from competition from cryptocurrencies, the World Gold Council (WGC) has said.

This is despite comments from some financial commentators that gold prices and demand are suffering at the expense of cryptocurrencies.

Last year the value of gold increased by 13pc, however the increase was a fraction on the 13-fold increase experienced by Bitcoin by the end of 2017.

The exceptional performance from Bitcoin, which was yesterday trading at one bitcoin to €9,097, has lead to suggestions from some financial commentators that the currency could replace gold.

However, in a new report the WGC has outlined the differences between the two commodities, arguing that gold is less volatile.

Since the collapse of Bretton Woods in the 1970s, the price of gold has, on average, appreciated by 10pc per year, and while the commodity increased rapidly in the late 1970s, its volatility has been relatively tame over the past four decades.

In comparison, Bitcoin has experienced high volatility, as evidenced by the sharp price correction that it has experienced since mid-December last year, where it fell by more than 40pc in a month.

In addition, the WGC report points to the fact that there are currently over 1,400 cryptocurrencies available worldwide and, while bitcoin is the largest by far, new technology could have a serious impact on the value and supply of any of the cryptocurrencies, including bitcoin the council argues.

The report also notes that cryptocurrencies do not have a clear two-way market, with reports suggesting that their volume is driven primarily by buy-and-hold investors.

So far the cryptocurrencies lack the characteristics common to most liquid markets, with the ability to short large quantities, the report says.

In addition, while the cryptocurrency market has been estimated to be valued at around $800bn, volumes of the commodity traded in the market are low compared to gold and other currencies.

Bitcoin trades $2bn, on average, per day, which is roughly equivalent to the world daily trading volume of gold-backed exchange-traded funds.

This volume of bitcoin trade is, however, less than 1pc of the total gold market that trades approximately $250bn a day, according to the report.

In its investment update, the WGC also highlights the diverse demand for gold.

"Large parts of gold's demand are deeply embedded within cultural and religious beliefs, especially in India and China," the WGC said. "Also, gold is a tangible good."

In comparison, cryptocurrencies are used as tokens in electronic payments systems.

Other differences highlighted by the report include the fact that gold has a price-responsive recycling market.

Since 1995, recycled gold, which is primarily sold by consumers for cash, accounts for around a third of the total supply of gold.

While the WGC also argues that, in comparison to cryptocurrencies, trade in gold is widely authorised and regulated in many markets. Despite the fact that most countries have not banned cryptocurrencies, they have deferred granting the currencies approval.

However, this could be set to change, with the Press Association reporting that BitFlyer, the world's largest Bitcoin exchange, has been given the green light for a European launch, building on its regulatory approval in the US and Japan.

Irish Independent

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