Bitcoin Frenzy Poses No Threat to Bullion, Goldman Sachs Says

Why Bitcoin Could Turn Into Digital Gold

The flurry of excitement over bitcoin and the lackluster performance of gold have begged the question: is the cryptocurrency taking demand from bullion?

The answer is no, according to Goldman Sachs Group Inc. While bitcoin has shown much greater volatility and lower liquidity compared to gold, the $275 billion market value of bitcoin is dwarfed by gold’s $8.3 trillion, analysts including Jeffrey Currie and Michael Hinds wrote in a note dated Dec. 11.

“While the lack of liquidity and increased volatility may keep bitcoin interesting, it’s unlikely to convince investors looking for the kind of diversification and hedging benefits which gold has proven to possess over its long history,” the analysts said.

Bitcoin jumped above $17,000 on Monday after starting the year around $1,000, with the launch of futures on the Cboe Global Markets Inc. exchange on Sunday adding to the frenzy. Gold’s up less than 10 percent in 2017.

They laid out three reasons why investors aren’t substituting bitcoin for gold:

  • Investor pools are vastly different:
    • Gold investors using exchange-traded funds, futures or commodity indices are automatically covered by anti-money laundering and counter-terrorist financing regulations, with even physical trading in jewelry, bars and coins seeing an increase in global regulatory scrutiny
    • By contrast, there’s little clarity on how trading in cryptocurrencies could be made to comply with these rules, creating huge hurdles for professional investors
  • No discernible gold outflows from ETFs:
    • “There is no evidence of a mass exodus from gold,” with total known holdings in bullion-backed ETFs near the highest since May 2013
  • Market characteristics of gold and cryptocurrencies are vastly different:
    • “While bitcoin has a mathematically certain total supply, and gold has a finite (but less certain) supply in the earth’s crust,” they have very different market dynamics, the analysts said. “The composition of demand between bitcoin and gold is the key difference. Bitcoin is attracting more speculative inflows”
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