„There is going to be one cryptocurrency that will be the online equivalent of gold and the one you’d bet on would be the biggest.“
Peter Thiel
„Bitcoin is about the network effects. The first network effect is speculation. People have been collecting and speculating in gold and silver and sodium bicarbonate for centuries. The second network effect is going to be merchants accepting bitcoin because people are holding it speculatively. Then merchants are going to start using it as payment themselves because they accept it.“
Trace Mayer
Cryptocurrencies experienced a meteoric rise in 2017. Where do they come from and why are they here? Seasoned Nobel laureates expressed their skepticism about cryptocurrencies several times in the past year – probably because this new phenomenon does not fit into the mindset of the mainstream-representatives of the economics profession.
Even among gold sympathizers, crypto proponents and critics are roughly in balance. This ambiguity is quite surprising, because Bitcoin is viewed by some as a digital alternative to gold. After all, the creation of cryptocurrencies was supposedly inspired by the yellow precious metal. Therefore, Bitcoin is often referred to as “digital gold”.
As we wrote in the chapter “In Bitcoin We Trust?” in our In Gold we Trust report 2017, Bitcoin – like gold – cannot be inflated by a central bank.[1] Furthermore, neither gold nor Bitcoin is anyone else’s liability, which is why they do not harbor an immediate counterparty risk. Both offer protection against negative interest rates and the demonetization of fiat money.[2]
Bitcoin can be viewed as a fiat money in the narrower sense that imitates a commodity money.[3] Like gold, bitcoins also have to be mined, but digitally. The production of new bitcoins requires substantial computational power and electrical energy, which ensures a kind of digital scarcity due to the difficulty and time lag of the mining process. Unlike gold, Bitcoin is from the outset limited to an absolute total amount that is already established today: there will never be more than 21mn bitcoins, all of which should be mined by 214o. Bitcoin is programmed to issue a certain number of new coins approximately every ten minutes. Since its creation in 2008, this amount of newly created bitcoins has decreased every four years. Today we are at 12.5 bitcoins every 10 minutes; in 2020 we will be down to 6.25; and in 2024 to 3.125.
A year ago we had already pointed out the similarity between gold and Bitcoin in terms of their respective stock-to-flow ratios (SFR). While gold has an SFR of about 64 years, Bitcoin’s is about 25 years.
Sources: World Gold Council, bitcoinblockhalf.com, Incrementum AG
Bitcoin’s SFR will continue to increase over time as the number of newly created bitcoins halves every four years. In 2024, the SFR will be approximately 119 years.[4] The SFR of Bitcoin will then be ceteris paribus about twice as high as that of gold. For some, this makes Bitcoin the ultimate store of value, one that might even be superior to gold in the future.
Sources: World Gold Council, bitcoinblockhalf.com, Incrementum AG
“The world ultimately will have a single currency, the internet will have a single currency. I personally believe that it will be bitcoin.”
Jack Dorsey
Since Bitcoin has catapulted itself into the limelight with its spectacular rally in the past year, some analysts have seen the position of gold as safe haven threatened. It is often said that Bitcoin could challenge a large part of gold’s market capitalization. However, the market capitalization of Bitcoin is still just under USD 150bn, while gold has a market capitalization of over USD 7tn.
But there is a key reason why Bitcoin could gain some ground over gold with respect to their respective market capitalization in the future. That is the fact that our lives are becoming increasingly digital. With the emergence of the internet and e-mails interpersonal communication has changed fundamentally. Today, direct global communication in real time, made possible by instant messengers of all kinds, has become an integral part of life. Similarly, with the emergence of Bitcoin a fundamental change is about to happen as people share value units peer-to-peer across the internet.
The Millennials in particular should play a decisive role here. Growing up as “digital natives”, they are cultivating a lifestyle very different from that of their parents –a digital one. Just as some female Millennials of today look forward to a digital bouquet delivered via smartphone on Valentine’s Day, digital gold in the form of Bitcoin could be more real for this generation than an actual gold bracelet or ring.
The digital revolution is not leaving its mark on just the financial world. The “digital natives” of today are the financial clients of tomorrow. As Bitcoin and other cryptocurrencies threaten the very existence of banks, they have to devise new ways of thinking about how best to respond. One possibility would be to integrate the emerging asset class around Bitcoin into their business models in order to neutralize the threat of a widespread loss of customers.
Bitcoin should be of interest not only to innovative commercial banks but also to central banks themselves. Today, key central banks hold some of their assets in physical gold. This serves as a safety buffer for their national currencies. It cannot be ruled out that central banks will be able to supplement this safety buffer with Bitcoin as a new reserve facility in the future.[5] Yet to date, no central bank has hinted at doing so, but the idea seems to make sense. Mario Draghi, president of the ECB, has though already indicated that European commercial banks could hold Bitcoin positions in the foreseeable future.[6]
Due to its decentralized set-up Bitcoin as an independent asset could undoubtedly acquire geopolitical relevance, provided it proves to be an invulnerable investment over the next few years. For a few lateral thinkers Bitcoin already seems to have this geopolitical component. They argue, why else would the hitherto hesitant US regulator suddenly approve Bitcoin futures, less than a week after the announcement by Russia, China, India, and Brazil to launch a new gold trading platform? It is commonly known that China and Russia have begun to massively increase their gold holdings in recent years and are thus working towards de-dollarization.[7] The lateral thinkers therefore consider it possible that the US has seen through this scheme and views Bitcoin as a new alternative in the geopolitical intrigue of global currency competition. While US-affiliated Japan also seems well-disposed to Bitcoin, Russia and China have opposed the cryptocurrency. The Chinese government has even tried several times to crack down on Bitcoin through bans and tough regulation.[8] Of course, these are hypothetical interpretations of recent events, which may seem a bit far-fetched – but such interpretations are not absurd.
In order to achieve the same monetary status as gold, Bitcoin, given its still juvenile age of 9 years, will though have to prove itself over the next few years or decades. Gold has proven its value over several thousand years and has therefore become an independent reserve asset Critics of Bitcoin rightly point out that the cryptocurrency so far has seen only the unusual market environment that has existed since the last financial crisis. Over the past ten years – exactly coinciding with Bitcoin’s lifetime so far – central banks have created a veritable everything-bubble of assets with their ultra-expansionary monetary policy. Also the cryptocurrencies have definitely benefited from it. At the same time, they have pushed market volatility down and de facto eliminated risk pricing on the financial markets. The question is: How will Bitcoin behave in a recession? And how will the Bitcoin price react in the wake of a crash of the financial markets?
Courtesy of Hedgeye
“Unlike every previous bubble in history, bitcoin prices do not generate a supply response. Real estate bubbles cause overcapacity in real estate; government bond bubbles bring government spending and huge supplies of new government bonds. But the quantity of bitcoin increases at a steadily slowing pace. And the higher its price runs, the more it seems to validate price targets of hundreds of thousands or even millions, enticing those who own bitcoin to take them off the market.”
Dan Oliver
The future does not necessarily hold a bitter struggle for the supremacy of the ultimate independent reserve asset. Gold and Bitcoin cannot just coexist, they can even be combined to get the best of both worlds. There are numerous attempts to tie gold, as well as other precious metals, to a blockchain. For many investors, cryptocurrencies are a new, interesting asset class. There is just one problem: Existing cryptocurrencies such as Bitcoin are currently exposed to major market fluctuations. Many investors, especially institutional players, are deterred by the high volatility.
In contrast, a gold-backed cryptocurrency could provide relief. Gold is significantly less volatile than Bitcoin – not least because the yellow metal has a buffer due to the jeweleries’ and recycling industry’s demand for gold, which significantly reduces its volatility. In order for the crypto market to establish itself in the long term and for cryptocurrencies to be used by companies, it has to rely on so-called “stablecoins”,[9] cryptocurrencies such as gold-backed cryptocurrencies that are stable in price.
In the following, we want to present the most promising combinations of gold and blockchain technology. Quite recently, TradeWind Markets Inc., a technology provider backed by Sprott Inc., Goldcorp Inc. and IEX Group Inc. launched a new digital gold trading and settlement platform that aims to simplify and speed up trading and reduce transaction costs. The Royal Canadian Mint will provide storage for the platform, confirm that it’s in possession of the physical gold that underlines it, and guarantee the option of physical delivery.[10]
Moreover, the UK’s Royal Mint and the CME Group have launched Royal Mint Gold (RMG), a new digital gold standard, as they call it. Each RMG is supposed to be backed by one gram of gold in a vault that is to be controlled and audited by the Royal Mint.[11] At the same time, the CME Group is to provide the platform for the real-time trading of RMG tokens. Ultimately, the RMG tokens are to be considered electronic warehouse receipts that entitle the holder to receive a corresponding amount of physical gold. The value of an RMG token is thus closely linked to the price of gold. In contrast to traditional gold investments, this scheme should not incur any storage or management fees.[12] Yet anyone who buys into the RMG system has to pay a still to be fixed premium that is above the spot price of gold. This markup is a source of revenue for the creators of the RMG token.[13]
There is also another huge advantage to be gained from blockchain-based gold trading: There is no doubt that today the value of paper gold certificates far exceeds the value of real gold in existence. It is commonly argued that the price of gold is manipulated, as increased physical demand was merely offset by an enormous expansion of paper gold on the supply side. If a blockchain could actually ensure that every ounce of physical gold could be held only once or only by a defined number of people, this would significantly reduce the ability of market participants to produce excess paper gold. In other words, the digitization of gold on the blockchain should theoretically enable us to limit the leverage effect of financial players in the paper gold market.
However, a combination of gold and the blockchain technology should also bring another decisive advantage: The new technology will make it easier to integrate gold into today’s payment systems. The precious metal will be made more easily accessible, particularly to the aforementioned Millennials. As they tend lead digital lifestyles, it is unlikely that a large number of these “digital natives” will want to acquire physical gold. However, if it can be purchased via a token, chances are that Millennials will become interested in buying gold.
Therefore gold should be tokenized, as roughly described in the example of the RMG token. Tokenization means that gold bars or gold coins are provided with a token via cryptographic encryption. The token in turn is recorded on the corresponding blockchain. The token and corresponding amount of gold can be accessed only by the holder of the private key for the token. The token and, indirectly, the gold can be traded and used as collateral or as a means of payment.
One of the most prominent examples of such an attempt to tokenize gold is the concept of DigixDAO.[14] This is an open source project that aims to tokenize valuable assets, such as gold, through the Ethereum blockchain. The DGX token, gives the holder of the token the right to receive one gram of gold stored in a certified safe in Singapore. The title claim is secured by a “proof of asset”.[15]
Ultimately, the DGX token is intended as an issuable, digital warehouse receipt for gold, whose ownership is to be allocated through the Ethereum blockchain and thereby secured. Of course, this type of payment by transferring claims to gold, which remains in vaults and does not have to change hands physically, is nothing new. The first modern Italian banks already did this. What is new is that these claims will be actual warehouse receipts and not debt claims. In addition, a change of ownership will take place via the exchange of the corresponding token and not via named account balances in the books of the depositary.
The synthesis of gold and blockchain will also ensure that the precious metal can be spent more easily again. It is a fact that today, for most of its owners, gold serves primarily as a store of value. This seems to be the case with Bitcoin as well: Its use as a medium of exchange is limited, precisely because it is a successful store of value. Gold-backed tokens are intended to remedy this situation and to re-establish gold as a means of payment.
One of the best-known and most respected names in the precious metal community is also trying to use blockchain technology. Our dear friends at Goldmoney have launched a new platform, allowing users to buy gold that is stored in the safe of the Royal Canadian Mint. The transactions made for this purpose are recorded on a private blockchain. As a buyer you pay a fee of 0.5% and receive free storage for up to one kilogram of gold as a bonus.[16]
Goldmoney has also started doing business with Bitcoin and other cryptocurrencies. Since the beginning of this year, the company has been offering its users the ability to buy and store Bitcoin, Ethereum, and soon Bitcoin Cash in a readily auditable and AML-compliant[17] way. Goldmoney also states that the cryptocurrency holdings of customers stored in a cold storage solution[18] are password protected and thus safe from being used in hot wallets.[19]
Another gold-backed cryptocurrency, which will also act as a means of payment, is called OneGram. This cryptocurrency was launched in Dubai and is one of the few Sharia-compliant cryptoassets. OneGram also offers its investors the possibility of becoming shareholders. It is envisaged that if more gold per share is deposited in the proposed vault, investors will benefit from this. The vault will be located in the Dubai Airport Free Zone.
Due to the following mechanism more gold will accumulate in the vault over time: In the beginning each OneGram token is backed by one gram of gold. Since each transaction with a OneGram token generates a small transaction fee that is supposed to be reinvested in gold, the amount of gold backing each and every OneGram token should increase.
The above-mentioned Australian Perth Mint wants to launch another project called Ozcoin. Similar to OneGram, this Australian-American project promises to issue only a limited quantity of tokens. Each Ozcoin token will be 100% gold-backed. However, there are two important points that need to be noted: First, only one-third of the gold reserves are effectively already mined and freely available. The other two-thirds are held to some extent as a reserve by a gold mining company. In addition, the tokens will be exchanged for gold only after five years.[20]
Not all gold-backed tokens have the declared goal of functioning as a means of payment, however. For example, HelloGold, a Malaysia-based startup, wants to help people save money in gold. HelloGold tries to give access to gold to people who can otherwise access their own savings only at the local bank. It focuses on countries that have been struggling with massive exchange rate fluctuations over the past twenty years. While it is easy for wealthier people to park their savings in assets such as real estate or stocks, the poorer classes in particular have been hit hard by the exchange rate fluctuations. That’s why HelloGold aims to provide an alternative in the form of HelloGold tokens. In this way, even less affluent people should be able to protect their savings through a gold-backed cryptocurrency.[21]
At this point we have discussed only some of the projects that seek to merge the gold and crypto worlds. There are many more initiatives that we will mention here by name only. The better-known ones are: AnthemGold, Xaurum, and Zengold.[22] Others include Flashmoni, GoldCrypto, Gold Bits Coin, XGold Coin, AurusGold, PureGold and Reales.[23]
“Finally, Bitcoin will go through hick-ups. It may fail; but then it will be easily reinvented as we now know how it works. In its present state, it may not be convenient for transactions, not good enough to buy your decaffeinated expresso macchiato at your local virtue-signaling coffee chain. It may be too volatile to be a currency, for now. But it is the first organic currency.”
Nassim Taleb
While some still do not agree, it seems clear that the world of Bitcoin and its fellow cryptocurrencies has come to stay. Crypto assets are to some extent the trump card that the younger generations, the Millennials, have over the older generation.
Does Bitcoin pose a threat to gold? Or more generally, are cryptocurrencies more of a foe than a friend? It seems beyond question that the many crypto projects will attract additional attention in the next few years and therefore more investment capital – simply because crypto is still very small compared to traditional asset classes and therefore has a lot of upside potential. However, it also seems clear that gold will always occupy a central position within the financial system – if only because an increasingly digital world awash with cryptocurrencies will trigger counterreaction in certain people, who will therefore consciously invest only in valuables that are real to them, such as precious metals.
But as we have tried to show in this chapter, gold and cryptocurrencies do not have to be viewed as opposites at all. Of course, each has its advantages and disadvantages. However, they complement each other and there is no reason to play one off against the other. Like gold, Bitcoin confers confidence but it does not depend on a central entity. The basis of trust is ultimately the decentralized blockchain network itself. Bitcoin and gold are not competitors but are rather complementary. While gold is a timeless constant, Bitcoin is currently a growing asset. Both offer opportunities.
Merging cryptocurrencies and gold also creates another alternative to state-controlled paper currencies. Although it is unlikely that the paper currencies will become obsolete overnight, the rise of gold-backed cryptocurrencies is a development that should be followed closely. Projects like DigixDAO look promising especially, and we will be excited to see how these crypto-gold tokens evolve.
It should not be forgotten, however, that there are still many questions to be answered when it comes to gold-backed cryptocurrencies. Although the idea of a blockchain-based gold exchange is attractive, we need to keep in mind that such a structure, in the form of a stock exchange, would again create a centralized hub that actually contradicts the philosophy of cryptocurrencies.
In addition, our research on many of the emerging gold-backed crypto projects has shown that the information available on the projects is not always clear and transparent; indeed it is often sketchy. Also, the crypto space is by no means immune to scammers, so investors should be particularly careful. Nonetheless, such negative factors are no reason to reject the new industry altogether. The future remains extremely exciting, and it cannot be ruled out that the current developments will create sustainable and valuable structures that will advance the worlds of crypto and gold.
[1] See “In Bitcoin We Trust”, In Gold we Trust report 2017, pp. 113-121
[2] See “In Bitcoin We Trust”, In Gold we Trust report 2017, pp. 113-121
[3] See “Theorie des Geldes und der Umlaufsmittel”, Ludwig von Mises, München und Leipzig: Duncker & Humbolt, 1912, p. 46
[4] See “In Bitcoin We Trust”, In Gold we Trust report 2017, pp. 113-121
[5] See “2018: The Year Central Banks Begin Buying Cryptocurrency“, Eugene Etsebeth, Coindesk, December 17, 2017
[6] See “European Banks Could Soon Hold Bitcoin, Admits ECB President”, CCN, February 8, 2018
[7] See “The De-Dollarization: Good-bye Dollar, Hello Gold?”, In Gold we Trust report 2017, pp. 66-90
[8] See “Trace Mayer: Bitcoin Can Become Reserve Asset“, Valentin Schmid, The Epoch Times, January 19, 2018
[9] See “Stablecoins: designing a price-stable cryptocurrency“, Haseeb Qureshi, Hackernoon, February 19, 2018
[10] See: This New Blockchain Platform Aims to Give Gold a Digital Edge, Bloomberg, March 26, 2018
[11] Royal Mint Gold website: “How RMG Works“
[12] Royal Mint Gold website: “FAQ“
[13] See “Combining Bitcoin with Gold“, Lawerence White, FEE, October 29, 2017
[14] See DigixDAO project website
[15] “DigixDao — The Future of Gold & a Solid Investment“, Colby Mort, Medium, September 14, 2017
[16] See “Goldmoney and the Royal Canadian Mint Record Gold Transactions on Blockchain“, Keith McGuinness, Cointelegraph, December 22, 2016
[17] Anti-Money Laundering
[18] This ensures that the crypto assets are kept as secure as possible. With a cold storage solution, the assets are stored in a way that is completely disconnected from the internet, which reduces the target size for potential hackers.
[19] See “Goldmoney Launches Ether and Bitcoin Cash Cold Storage“, Avi Mizrahi, Bitcoin News, March 1, 2018
[20] OzGold website
[21] HelloGold website: FAQ
[22] See “Gold Backed Cryptocurrency“, The Hutch Report:
[23] See “Gold-Backed Cryptocurrencies: Icing On An Already Tasty Cake“, DollarCollapse, 1 February 2018
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