Lately, the Bitcoin price correction has given a lot of negative vibes to the cryptocurrency space. But if you do zoom out a bit and look at the Bitcoin price history since 2009, it’s clear that BTC is a volatile instrument that has gone through similar phases quite a few times in past well. But of course, it’s now a much more followed asset (if we can call it that) than what it was just a few years ago.
Often Bitcoin is compared to gold – as a store of value. Right or wrong, both sides of the argument have quite strong and often vocal views. I don’t know if Bitcoin is New Gold or not.
But for a moment, let’s talk about the idea of intrinsic value.
In equity or debt investments, it’s easy to arrive at the range of possible intrinsic values. Because both these have cashflows in future which can be used as a basis. But neither gold nor Bitcoin has any cash flow.
A professor who is revered for his valuation expertise once shared an interesting idea about gold’s intrinsic value. He said that only assets those asses have easy-to-assess intrinsic values are expected to generate some reliable cash flows in the future. Since gold is not a cash-flow-generating asset, you cannot estimate the proper intrinsic value for it. But he also said something interesting. That even if gold did not have any intrinsic value per se, it still did have something that can be referred to as a relative value. That is often used as a measure to mentally give a value to gold.
Gold has always been seen as a safe haven and an alternative to financial assets that are directly or indirectly, linked to paper or fiat currency. Unlike earlier decades, the major currencies like the US dollar, etc. these days are not even backed by any physical commodity, such as gold or silver. It is just the trust in the government that issued it that stands as a promise behind the currencies. So, the value of any fiat currency for that matter is nowadays derived from the relationship between the supply and demand and also from the stability of the issuing government.
So, the value of paper currency rests entirely on trust in central banks and governments. As a safe haven, whenever people lost faith in currency due to any temporary reason (like a small economic crisis) or a permanent one (like hyperinflation in Zimbabwe that made the local currency worthless), then gold prices have surged. Throughout history, gold has been the asset of last resort for investors fleeing a crisis.
Similar is a case that seems to be developing for Bitcoin. While cryptocurrency does not have any intrinsic value, it does seem to have a relative value (at least theoretically) against the possibility of crisis when one looks at the free money being printed by developed nations.
Don’t get me wrong. I am not saying that Bitcoin will replace Gold. Gold has been here for millennials. And to be honest, I don’t see any reason why it will not still remain relevant for another few thousand years.
So even though a few of the cryptos, particular Bitcoin might develop more use cases and become more useful in times to come, I really don’t think that it will replace gold altogether.
And please understand that gold doesn’t just have a financial value. It has had a place in human society since time immemorial. We can’t really be sure how Bitcoin will look or be in the next few years. Or if there would be any other better versions of the concept itself. But it won’t be wrong to say that gold, as we know it, will still remain a reliable asset that people will continue to rely on when things go bad and when there is a need to hedge systemic risks.
I know that many people invest in Bitcoin for the long term. That is, they are the hodlers. I personally have a friend who invested quite early in Bitcoin about 9-10 years back. In fact, he had mentioned to me years back that there are people who are now considering adding Bitcoin to the traditional 60:40 Equity debt portfolio. At least by investing 1% portfolio in Bitcoin.
But these days, a vast majority of those who joined the crypto bandwagon in the last 1-2 years have come here attracted by the supersized returns that Bitcoin has delivered every now and then. Some of these people see bitcoin as their bet or you can say like a lottery ticket to a better life in future. There are in fact crypto lottery sites which operate with Bitcoin these days. So, no doubt there is a perception amongst many that Bitcoin has the ability to change people’s financial lives in years to come.
Millions of people have started imparting trust on Bitcoin and a few other cryptocurrencies that offer a distributed but completely trustless environment which decides the value of the cryptocurrency. BTC is currently trading in the range of $20-25,000. But as Winklevoss twins (the Billionaire crypto investors and from the Facebook origin controversy fame) made a case for much higher BTC prices in an article about What will be future price of Bitcoin – “For many, Bitcoin offers the opportunity to participate in asymmetric return bets that may go up 25-50 times from current value (Around $20,000 per BTC). This in many people’s minds, is an option to get protection from inflation when the government all over the world are busy printing money like there is no tomorrow.
Though we cannot compare both Bitcoin and Gold on the timelines of their existence, there is still one thing that is common. Neither BTC nor the yellow metal is under the control of central banks or the national governments. When people become worried about the financial or political systems that govern them, they look at gold as a safe haven.
A Forbes article on Bitcoin and Gold for investments puts it aptly, and I quote directly from there – “Gold and Bitcoin represent different phases of how people think about ‘money.’ Gold was a currency for thousands of years, and it retains value in part by the psychological and historical attachment investors have to it. Bitcoin, along with blockchain technology, hopes to one day replace government currencies as the means by which people exchange payments….More broadly, investing in gold reaffirms your belief in the current international financial system, whereas Bitcoin is a bet that a more radical alternative is coming.”
While most seasoned investors feel that gold should form about 5-15% of the long-term portfolio, the same is not the case for Bitcoin, at least as of now. While crypto enthusiasts may talk about being 100% in cryptos, that is too risky a thing to do for the common man. One should still have the core of the investment portfolio (95-99%) in established assets like equity, debt, and gold. Then there is also the legality of cryptocurrency in the country that one needs to assess before considering investing in Bitcoin in a serious manner.
So that was about how the idea of intrinsic value applies to Bitcoin and Gold as of today (2022).