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As someone who has worked in the gold industry for 35 years, spending 20 of these in gold fund management, I have not seen anything that has the potential to shake up the status quo in the monetary establishment like digital currency. However, while digital currencies may become a viable alternative to fiat currency, I don’t believe they threaten gold’s unique roll as a safe haven and form of portfolio insurance.
It is clear that those who promote digital currencies, like bitcoin, are using gold’s image to help validate their product. Press articles are often accompanied by pictures of shiny gold-colored bitcoins. Bitcoins are created by “miners”. In reality, digital currencies are not coins, they are strings of 0’s and 1’s stored in a computer in some unknown location and cannot be touched or seen.
At first glance, digital currencies do share some similarities with gold.
Both digital currencies and gold exist outside the financial mainstream and neither one is issued or controlled by a government or pays interest. They are both traded across borders and supply is limited (by definition for Bitcoin and by nature in the case of gold). For most transactions to be used in an economy, they must be converted into paper currency.

But digital currencies and gold are also different in significant ways. Gold is a tangible asset. Behind nearly every type of investment in gold is the underlying notion of the presence of gold bullion.

Investors in gold futures have the option of taking delivery. Most gold bullion ETFs are backed by secure, physical gold that is routinely audited. The over-the-counter market is a physical market.

Gold miners have gold in reserves that are securely “locked” in the ground. While many investors may not actually hold gold, they have confidence in a market that is underpinned by a physical asset that has a limited supply. So far there are no digital currencies that can be considered tangible and while the supply of Bitcoin is limited, the supply of potential digital currencies seems unlimited.
As I noted recently in a blog post, there other significant differences between digital currencies as they presently exist and gold:

Storage and delivery. If stored at home, gold can be used for barter the next time a hacker or solar flare takes down the grid. Digital currencies are worthless without electricity. Taking delivery will always be impossible with digital currency.

Wealth creation. Bitcoin miners use computer programs to solve complex math problems and receive in exchange new bitcoins. What does this activity have to do with creating a store of wealth?

Market Size. Gold’s market capitalization is roughly $8 trillion, of which $3 trillion exists in the form of coins and bars. Approximately $50 billion worth of gold trades each day. Bitcoin is microscopic in comparison, with a market capitalization of approximately $45 billion in total and $1.5 billion in daily trading volume.

Regulation. Most digital currency markets are lightly regulated and are located outside of the U.S. A major potential drawback to digital currency is their use for money laundering, illegal trading, computer ransom attacks, tax avoidance, and to subvert exchange controls. Governments are likely to intervene heavily if any of these activities become significant.

Vulnerability. Distributed ledgers are promoted as un-hackable. However, police were recently able to find the digital keys to an online criminal’s accounts and seize approximately $8 million in digital currencies.

History. Digital currency has yet to stand the test of time. We do not know if a digital currency that is secure today will be secure under new technology. Distributed ledger passwords could be relatively easily broken if quantum computing becomes a reality. Gold has been used as a store of value for thousands of years.

This is not to say that digital currencies may not alter the dynamics of the market. Imagine that a digital currency is created that functions like gold as a store of wealth and a hedge against tail risk. Let’s call it “bithaven”.
What then happens with gold? Just as SPDR Gold Shares (ticker: GLD) broadened the investor base for gold through ETFs, bithaven would similarly broaden the investor base for alternative currencies. Bithaven would likely cannibalize fiat currency and it might also cut into gold’s market. But it is more likely to bring people into gold as the broader population, and young investors in particular, scrutinize currencies and saving strategies more closely. If and when a digital asset is developed that carries a significant facsimile of gold’s attributes, it will likely become an investment option for actively-managed gold funds, like ours.

While most fads rarely stand the test of time, we have no argument with those who believe distributed ledger technology has tremendous potential to revolutionize finance and trade.

Further, we believe that digital assets are an investable asset class in their own right and that, in some form, they will continue to be integrated into the broader economy, whether as bitcoin, ethereum, or something not yet invented. While the future of distributed ledger technology remains to be seen, gold’s role as an ultimate store of value remains firmly in place.

Foster is portfolio manager and strategist for gold and precious metals with VanEck, a New York-based investment management firm.