Case Study: Identifying The Relationship Of Gold To Crypto
Article originally from Forbes by Luke Fitzpatrick
Jan 20, 2019
Since the beginning of modern history, gold has been an important means of storing value. In the past 200 years, the gold sector has remained relatively unchanged. However, there have been some interesting developments implying that change is just around the corner.
Over the years, gold has proven to be a suitable alternative to both fiat currency and cryptocurrency. The real question is, could it perhaps be both? In this article, we will be looking at three different trends and what this really means to the whole world of crypto: bitcoin, stablecoins and legislation.
Bitcoin could serve as a replacement for gold
During a recent Bitcoin summit in Israel, Nick Szabo stated that “Central banks will end up using bitcoin as a reserve currency.” In a Q&A session, Szabo also said, “I think it will be one of the many reserve currencies that can be used to underpin value on other things. There doesn’t have to be only one anymore.”
In an interview with MarketWatch, Inton said, “If cryptocurrency were to displace gold’s investment case, the implications for gold prices would be devastating. 40% of gold demand relates to investment, so a shift in investment from gold to cryptocurrency would be a seismic shock.” If this event were to come to pass, the repercussions would send shockwaves throughout the world’s global economy.
Felix Hartmann from the crypto hedge fund Hartmann Capital says, “Bitcoin bridges the gap between currency and a store of value asset. It maintains the speed and flexibility of fiat currency while remaining independent of central banks and governments and their macro-economic policies such as inflation.”
For a large number of new cryptocurrencies entering in 2018, most have proven to be inflated, volatile or unreliable. That’s why 2018 saw ICO’s on the downfall with stablecoins on the rise. This later became known as the “stablecoin frenzy,” mainly due to the benefits of cryptocurrency without the volatility.
Gold-pegged stablecoins emerged from the stablecoin frenzy. One good example of this is Novem who pegged their cryptocurrency to gold. According to a recent statement, the company has approximately 35 kg in LBMA-certified gold (Q1: 2019), stored securely by Loomis International. The amount of gold translates to almost $1,500,000 in collateral.
The aftermath of the stablecoin frenzy may lead to gold-pegged stablecoins flourishing—especially if the value is delivered to both consumers and businesses across the precious metal industry.
Gold and legislation
With a worldwide monetary crisis being just around the corner, Ron Paul who served US Congress for several terms from 1976 until 2013, wrote a formal paper, called “The Dollar Dilemma: Where to From Here?”
Paul said, “There are several major efforts being made to replace the fiat dollar with gold or cryptocurrencies, while other countries are making plans to challenge the dollar as the world’s reserve currency.” What this really means is that gold or cryptocurrencies could, in the very near future replace fiat.
However, this begs the question, what happens next? Crypto investors need “regulatory clarity.” According to a recent article by Cointelegraph, legislation clarity may indeed be underway. “Two United States congressmen introduced a bill in the House of Representatives on Dec. 20 that would exclude digital assets from being defined as securities.”
In the near future, it will be interesting to see what happens with gold, bitcoins and stablecoins. A lot of this hinges on the government’s aptitude to provide investors with regulatory clarity, stablecoin adoption, and will gold continue to be the reserve currency? Right now, it’s too early to say, but one thing remains clear—the financial markets are in for a change.