Are Cryptocurrencies the new Gold?

News Arnulf Hinkel, financial journalist – 06.09.2018

Bitcoin, Etherum & Co. have been repeatedly referred to as the "gold of the digital age". The production of new Bitcoins involves elaborate computation and is called mining, and the similarities between gold and crypto currencies, such as the fact that both are largely independent from state intervention and have a similarly high annual production rate, are often pointed out. Another similarity is certainly the apparently limitless euphoria gold diggers showed during the Californian gold rush in the 19th century, and the enthusiasm fans of digital currencies display today. However, serious differences do exist between gold and cryptocurrencies that make juxtaposition of the two seem downright absurd.

From currency to mere object of speculation

Digital currencies were originally created as anonymous means of payment, independent of the existing monetary system. Today, the more than 4,500 different crypto currencies are used almost exclusively for investment purposes ¬ which is hardly surprising, given the fact that they showed value increases unthinkable on the traditional capital market: the value of the pioneer digital currency Bitcoin rose from US$0.1 in October 2010 to US$10,000 in November 2017. However, the still young history of cryptocurrencies has shown that extreme value losses are also possible.

Currencies without intrinsic value are high-risk investments

Gold is the oldest means of payment on earth, and gold bars make for a good part of most countries' national currency reserves. Moreover, gold is an indispensable raw material in technology and healthcare industries, as well as an essential component of fashion and jewellery. Digital currencies, on the other hand, have no intrinsic value: it depends solely on the trust of the people who invest in them. The recent example of Envion, the largest German ICO (Initial Coin Offering), which collected US$100 million from customers and now faces closure, shows how quickly euphoria can turn into disenchantment. The token Envoin issued recently dropped by more than 90 per cent, evoking memories of the dot.com bubble come.

Comparisons with gold, on the other hand, do not come to mind.

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