Citibank analyst Thomas Fitzpatrick made waves after he called a seemingly implausible $318,000 price target for bitcoin by December 2021.
Such is the level of bullishness in this market.The global head of CitiFXTechnicals market insight product drew on bitcoin’s 2010-11 “exponential move” as being “very reminiscent” of the 1970s gold market.Gold had remained range-bound in a narrow $20–$35 price range before a major fiscal policy change by the Nixon administration in 1971 led to a major breakout for the traditional safe haven.
However, there are several reasons why bitcoin would have a much harder time replicating gold’s rally four decades ago.
Digital gold?
Remember the Winklevoss twins, those guys who pushed hard to have the first bitcoin ETF approved and quipped that bitcoin would one day become better at being gold than gold itself.According to theWinklevoss, the only advantage the yellow metal has over BTC is a 3,000-year head-start.
If that sounded a bit over the top, consider that BlackRock’s CIO for fixed income Rick Rieder recently said that he believed that bitcoin could take the place of gold because ‘‘It’s so much more functional than passing a bar of gold around.”
But how realistic are these claims?
Sure, the COVID-19 pandemic, a decoupling of gold from fiat currencies, and the desire for central banks to pursue aggressive quantitative easing policies have served as bullish trends for safe havens like bitcoin and gold.
But that does not mean that time has come for bitcoin to replace gold.
The bitcoin camp certainly has made its case: BTC has many attractive features that trounce gold’s including being mathematically scarce, harder to counterfeit, portable, transferrable and superior divisibility thus allowing micro-transactions (try buying a latte using a gold bar).
Yet, bitcoin’s sexy attributes could also be its undoing.
Randy Smallwood, CEO of Wheaton Precious Metals, says that simple physics prove that cryptocurrencies will never replace gold.
His argument is pretty straightforward, ‘‘ The beauty of gold is that it’s a solid asset.It’s been around for a very long time and will continue to be around.The problem with cryptocurrencies is that the market is always changing and you constantly have to watch it.’’
But here comes the punchline, “All cryptocurrencies are virtual and therefore are replaceable.But there is only one type of gold.”
Smallwood says that the crypto industry is so fragmented that thousands of companies are competing to create their own versions that five years from now BTC will look like a dinosaur compared to the sexy and younger upstarts that will flood the market.
Indeed, Smallwood has a point.Experts usually put forward three possible scenarios that would make BTC and possibly other cryptocurrencies irrelevant:
– Multiplication
– Government Takedown
– A major hard fork
Further, it’s a bit preposterous to presume that bitcoin could ever fully replace gold.Gold is not only a useful inflation hedge but also has intrinsic value since 70% of global demand goes to jewellery, electronics and other Industrial uses.
This helps keep the price of gold relatively stable.Virtual currencies, on the other hand, have no comparable intrinsic value which makes them far much more volatile and therefore poor inflation hedges.
With BTC currently changing hands at slightly above $19,000, Fitzapatrick’s bold call would see the leading cryptocurrency rally 1,600%, effectively taking its market cap to nearly $6 trillion.That’s a massive increase, but would still fall short of the global gold market currently valued at ~$15 trillion.
To complicate matters further, there are no clearly established liquidity gateways that would facilitate such massive flows between the rival assets, meaning it would probably take many years for that to happen.
In short, BTC could very well breach $20K in the coming weeks but a runup to $300K and beyond remains a really long short.
By Michael Kern for Safehaven.com
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