Bitcoin, fool’s gold

Looking back at 2017, I think the biggest financial news for the year was bitcoin’s meteoric rise from $964 on 1 Jan 2017 to a high of $19,100 on 18 Dec, a return of 1,884% in less than 12 months. After hitting the highs, its price has fallen and is currently trading at $14,000. Its volatility is not for the faint hearted.

Bitcoin started life as an alternative currency with the advantages of 1) not requiring an intermediary to make transactions and 2) free of government’s regulation. However, as its rise caught the attention of the masses, pundits started calling it the new gold.

That statement got me thinking, what makes gold valuable? So I dug around the internet to find out.

Base metals such as copper or iron derive their value from their industrial demand. Almost all of the base metals extracted are put to industrial use. Compared to the base metals, the industrial demand for gold only takes up 12% of its annual supply and yet gold is far more valuable than the base metals. For example, at current prices, a tonne of copper is worth US$7,018 and a tonne of gold is worth US$41.2 million.

To understand why gold is valuable, we have to go back to early human civilisation during the early days of coins. Gold is valuable due to its chemistry. In the early days, gold’s properties made it an ideal choice of metal to be forged into coins.

  • A currency needs stability and gold is relatively scarce and its supply steady. It is much more scarce than iron or copper but more abundant than some of the platinum group metals. Coins would have to be much smaller with more limited supply if they were made from palladium.
  • Compared with other metals, gold has a relatively low melting point (1,000c) which made it easier for ancient man to extract and smelt as compared to say aluminium, which is much harder to extract and has a melting point of 2,000c. Ancient man just didn’t have the specialist equipment to smelt metals that had high melting points.
  • Gold is “beautiful” and is non-reactive to air and water. A gold coin casted today will look pretty much the same a thousand years from now. Iron rusts, copper turns green and even silver tarnishes, gold however stays the same.

Man’s infatuation with gold has existed for at least 5,000 years if not more, its value is ingrained into our psyche and culture. Bitcoin on the other hand, has only existed since 2009.

So do I think Bitcoin is the new gold? Absolutely not.

I believe Bitcoin is in bubble territory because its current value is not supported by anything other than pure speculation. As an asset it does not generate any cash flow (so it’s nearly impossible to value) and as a form of currency, its volatility makes it undesirable. Therefore, it serves no utility for the vast majority of society.

However, I believe Bitcoin will be worth something due to its underlying demand from vice activities. Bitcoin being decentralised and anonymous is perfect for money laundering activities.

Have a happy new year and prosperous 2018!

Leave a Reply

Your email address will not be published. Required fields are marked *