All the Reasons Cryptocurrencies Will Never Replace Gold As Your Financial Hedge (2024)

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The cryptocurrency craze continues.

Having seen the astounding rise in Bitcoin’s value, those who remained on the sidelines are now kicking themselves for not buying it when it was first released. Surely, they’d be millionaires by now.

But is the meteoric rise ofBitcoin and other cryptocurrencies really an indication of true value?

It seems that more and more people justify investing in cryptocurrencies — even at current record prices — by claiming that they’re an effective hedge against the instability of fiat currencies.

But is it true?

Sure, a fiat money system where central banks can and do literally print money at will has its weaknesses. That’s why hard assets like gold are so popular among smart investors: as real stores of value, they provide asafety net against currency depreciation.

However, it’s doubtful that the same applies to cryptocurrencies. Despite what the crypto-evangelists will tell you, digital tokens will never and can never replace gold as your financial hedge.

Here are six reasons why.

#1: Cryptocurrencies Are More Similar To A Fiat Money System Than You Think.

The definition of “fiat money” is a currency that is legal tender but not backed by a physical commodity.

Since the United States abandoned the gold standard in the 1970s, this has been the case with all major currencies, including the US dollar.

Ever since then, U.S. money supply has kept increasing, and so has the national debt. In contrast, the dollar’s purchasing power has been on the decline.

Take a look at this historicalgold price chart.

Source: Hard Assets Alliance

Source: Hard Assets Alliance

The huge spike in gold prices started right around the time when the Bretton Woods agreement collapsed in 1971 and U.S. paper dollars couldn’t be converted to gold anymore. A clear sign of the decline in the dollar’s purchasing power since the move into a pure fiat money system.

It’s clear that cryptocurrencies partially fit the definition of fiat money. They may not be legal tender yet, but they’re also not backed by any sort of physical commodity. And while total supply is artificially constrained, that constraint is just... well, artificial.

You can’t compare that to thephysical constraint on gold’s supply.

Some countries are also exploring the idea of introducing government-backed cryptocurrencies, which would take them one step closer toward fiat-currency status.

AsRussia,India, andEstoniaare considering their own digital money,Dubaihas already taken it one step further. In September, the kingdom announced that it has signed a deal to launch its own blockchain-based currency known as emCash.

So ask yourself, how can you effectively hedge against a fiat money system with another type of fiat money?

#2: Gold Has Always Had And Will Always Have An Accessible Liquid Market.

An asset is only valuable if other people are willing to trade it in return for goods, services, or other assets.

Gold is one of the most liquid assets in existence. You can convert it into cash on the spot, and its value is not bound by national borders. Gold is gold—anywhere you travel in the world, you can exchange gold for whatever the local currency is.

The same cannot be said about cryptocurrencies. While they’re being accepted in more and more places, broad, mainstream acceptance is still a long way off.

What makes gold so liquid is the immense size of its market. The larger the market for an asset, the more liquid it is. According to the World Gold Council, the total value of all gold ever mined is about $7.8 trillion.

By comparison, the total size of the cryptocurrency market stands at about$161 billionas of this writing — and that market cap is split among 1,170 different cryptocurrencies.

That’s a long shot from becoming as liquid and widely accepted as gold.

#3: The Majority Of Cryptocurrencies Will Be Wiped Out.

Many Wall Street veterans compare the current rise of cryptocurrencies to the Internet in the early 1990s.

Most stocks that had risen in the first wave of the Internet craze were wiped out after the burst of the dot-com bubble in 2000. The crash, in turn, gave rise to more sustainable Internet companies like Google and Amazon, which thrive to this day.

The same will probably happen with cryptocurrencies. Most of them will get wiped out in the first serious correction. Only a few will become the standard, and nobody knows which ones at this point.

And if major countries like the US jump in and create their own digital currency, they will likely make competing “private” currencies illegal. This is no different from how privately issued banknotes are illegal (although they were legal during the Free Banking Era of 1837–1863).

So while it’s likely that cryptocurrencies will still be around years from now, the question is, which ones? There is no need for such guesswork when it comes to gold.

#4: Lack of Security Undermines Cryptocurrencies’ Effectiveness.

Security is a major drawback facing the cryptocurrency community. It seems that every other month, there is some news of a major hack involving a Bitcoin exchange.

In the past few months, the relatively new cryptocurrency Ether has beena target for hackers. The combined total amount stolen has almost reached $82 million.

Bitcoin, of course, has been the largest target. Based on current prices, just one robbery that took place in 2011 resulted in the hackers taking hold of over $3.7billionworth of bitcoin—a staggering figure. With security issues surrounding cryptocurrencies still not fully rectified, their capability as an effective hedge is compromised.

When was the last time you heard of a gold depository being robbed? Not to mention the fact that most depositories have full insurance coverage.

#5: Hype and Speculation Continue to Drive Cryptocurrencies’ Value.

Since the beginning of the year, the value of Bitcoin has more than quadrupled — a tremendous spike in value that has sent investors rushing to invest in cryptocurrencies. But could this be nothing more than a market bubble?

One of the world’s most successful hedge fund managers, Ray Dalio of Bridgewater Associates, certainly seems to think so.

In September 2017, he toldCNBC, “It's not an effective storehold of wealth because it has volatility to it, unlike gold. Bitcoin is a highly speculative market. Bitcoin is a bubble.”

The spike in Bitcoin prices seems to only lend credence to this view. With such an extreme degree of volatility, cryptocurrencies’ value as a hedge is questionable. Most people buy them for the sole reason of selling them later at higher prices.

This is pure speculation, not hedging.

#6: Cryptocurrencies Do Not Have Gold’s History As A Store Of Value.

Cryptocurrencies have been around for less than a decade, whereasgold has been used as a store of value for thousands of years. Because of this long history, we know for a fact thatstocks and bonds have low or negative correlations with gold, particularly during periods of economic recession. This makes gold a powerful hedge.

What little data we have on cryptocurrencies does not show the same. Consider this year alone: while the U.S. stock market continues to run record highs, the same goes for Bitcoin.

It’s true that gold has also gone up, but the correlation has been very low and, during times of recessions, tends to swing to the negative side, as you can see in the graph below.

Source: Hard Assets Alliance

Source: Hard Assets Alliance

Since 2010, there have been 15 times where the S&P 500 has seen drops of 5% or more. Out of those 15 stock market downturns, Bitcoin has been down for 10 of them.

How is that a good hedge?

All the Reasons Cryptocurrencies Will Never Replace Gold As Your Financial Hedge (2024)

FAQs

Why cryptocurrency will not replace money? ›

Unlike governments that can print more money, coins cannot be created (the exact amount was defined in the Bitcoin protocol when it launched in 2009) which prevents inflation and devaluation of its value. There will never be more than 21 million Bitcoin (each is divisible into 100 million 'satoshis').

Can cryptocurrency replace gold? ›

It's unlikely that all investors will replace gold with Bitcoin in their strategies. What's more likely to happen is that each will have a place in a portfolio based on preferences and risk tolerance.

Why is crypto better than gold? ›

Key Points

Gold's supply can increase with demand shocks, while Bitcoin's ultimate supply is capped. Bitcoin is easier to store, transport, and transact with. Over the past few years, Bitcoin has been able to significantly increase one's purchasing power.

Will cryptocurrency replace the dollar? ›

While the US dollar has maintained its value for decades. Fund Investors and expert traders may be attracted to Bitcoin, but ordinary people are risk averse Bitcoin can show its long-term stability, it can never replace the US dollar among the general public.

Is crypto safer than banks? ›

Crypto is not regulated like stocks or insured like real money in banks. Crypto's high risks can offer big rewards or huge losses.

Why is crypto not a good investment? ›

There are several risks associated with investing in cryptocurrency: loss of capital, government regulations, fraud and hacks. Loss of capital. Mark Hastings, partner at Quillon Law, warns that investors must tread carefully in crypto's unique financial environment or risk significant losses.

Is crypto safer than gold? ›

Key Points. Gold's use as a store of value gained popularity in the 1970s when inflation ran rampant. Since the 1970s, gold hasn't kept pace with inflation. Although Bitcoin and gold have similarities, Bitcoin's decentralization, security, and true finite supply make it the superior asset.

Why Bitcoin can t replace gold? ›

Another reason why bitcoin may never fully replace gold is that it is highly volatile. The value of bitcoin can fluctuate significantly in a short period of time, which makes it a risky investment. Gold, on the other hand, tends to be much more stable in value.

How much will $100 Bitcoin be worth in 10 years? ›

A $100 investment in Bitcoin could purchase 0.00607 BTC today based on a price of $16,466.14 at the time of writing. If Bitcoin hits the $1 million price target by Wood in 2030, the $100 investment would turn into $6,070. This represents a gain of 5,970% from now until 2030.

What is a better hedge than gold? ›

Gold is often hailed as a hedge against inflation—increasing in value as the purchasing power of the dollar declines. However, government bonds are more secure and have shown to pay higher rates when inflation rises, and Treasury Inflation-Protected Securities (TIPS) provide built-in inflation protection.

Why is gold not the best investment? ›

There are several potential risks to investing in gold, including: Price volatility: The price of gold can be volatile, and it may fluctuate significantly over short periods of time.

Why is crypto better than real money? ›

Some blockchains can provide privacy, security, and 24-7 access to any global user. A sort of swiss-army knife, users can earn, fund, invent, invest, pay, and program. Cryptocurrencies can offer lower associated fees and more cost-efficient transactions.

Which country is American money worth the most? ›

Some of the countries where a dollar is worth the most money include Mexico, Peru, Chile, and Colombia. It's possible to exchange dollars for local currency in these countries at favorable exchange rates.

Why do banks not like crypto? ›

Central Banks have been traditionally wary of the adoption of cryptocurrencies due to several factors, such as the potential for illegal activities, the lack of control over the monetary policy, and the potential for financial instability.

Will crypto take over cash? ›

It's unlikely that cryptocurrency, in its current form, will replace fiat currency in developed countries. However, it is possible in financially struggling nations.

Will banks be replaced by crypto? ›

Bitcoin's technology relies on algorithmic trust, and its decentralized system offers an alternative to the current system. However, because of the issues it raises and faces, it is unlikely that it will replace central banks anytime soon.

What will replace money in the future? ›

The future of money is expected to be heavily influenced by technology. Predictions include the rise of cashless societies, the growth of cryptocurrencies, the continued adoption of digital currencies, and the potential offering of a Central Bank Digital Currency (CBDC) by governments.

What will replace currency? ›

IMF says central bank digital currencies can replace cash: 'This is not the time to turn back' IMF's Kristalina Georgieva said that the public sector should keep preparing to deploy central bank digital currencies and related payment platforms in the future.

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