One of the odder aspects of today's markets is that bitcoin is soaring but gold, the original alternative currency, isn't.
At first glance, this disparity doesn't make a lot of sense. Both commodities are essentially bets against government-backed paper currencies. If you're a libertarian or an economic pessimist who believes that dollars, euros and yen are doomed to ultimately fail, it makes sense to load up on substitutes such as bitcoin and gold. However, it's not immediately clear why you would prefer one of those alternative assets to the other.
So what accounts for their different paths in recent months? Bitcoin's value in U.S. dollars has rocketed more then 450 per cent this year, while the price of gold has risen only 11 per cent since January.
The enormous gains in bitcoin's value no doubt owe a lot to its cool factor – cryptocurrencies are the trendy thing to buy, especially for those who consider themselves online cognoscenti. But it's also possible something more is going on here than simply the thrill of the new. Perhaps the market is deciding, on quite rational grounds, that bitcoin is better than gold. If so, that decision would hammer gold miners and precious-metals investors.
Let's not rush to judgment, though. Before we conclude that gold is defunct, it makes sense to compare the two alternative currencies, head to head. Here is how they match up on six important criteria.
Both gold and bitcoin resist physical decay, but, according to a recent Goldman Sachs report, there is an important difference when it comes to storing the two commodities: How safe you can feel that what is there today will be there tomorrow.
Bitcoin is vulnerable to being hacked, no matter whether it's held in an online wallet or in a computer. Some of the world's biggest bitcoin exchanges – such as Bitfinex in Hong Kong or Mt. Gox in Tokyo – have been looted in recent years, as have numerous smaller operators.
Say what you will about boring old gold, but it is far more difficult to steal the stuff, especially if it's held in a secure vault.
To be sure, the same qualities that make gold hard to steal also make it hard to transport and use. Among other drawbacks, it's infernally heavy and also difficult to spend in small amounts: Try buying a chocolate bar with bullion.
By comparison, bitcoin is immaterial and, therefore, weightless. It can be transferred from one user to another in privacy, over the internet, in small or large amounts, anywhere in the world. While not widely accepted by Main Street businesses right now, that could change with time.
Gold bugs like to remind us of the rarity of their favourite metal. They calculate that all the gold mined in the history of the world would fill only slightly more than three Olympic-sized swimming pools.
For their part, bitcoin advocates point out the total supply of their digital alternative is also limited because of technical factors having to do with how new coins are "mined."
But, as the Goldman report pointed out, bitcoin is only one of hundreds of cryptocurrencies already in the market. It's relatively easy to launch new ones, meaning the supply of cryptocurrency as an asset class is theoretically without limits.
Consumers typically want to understand why a currency has value. In the case of paper currencies such as the Canadian dollar, the presence of a government sponsor is crucial. Coloured pieces of government-issued paper become valuable, at least in part, because citizens know they can use those pieces of paper to pay taxes.
It's much more difficult to explain why bitcoin should be worth anything. Many people buying bitcoin have only the murkiest understanding of the underlying blockchain technology. Even those who understand the blockchain tend to stammer when called upon to explain why the system should result in a usable currency rather than merely being a superefficient method of bookkeeping and money transfer.
Of course, gold's ultimate value is also debatable, since the metal has only limited functional uses. To make matters worse, it offers no yield, which reduces its appeal at times such as now, when interest rates on competing assets appear to be on the upswing. But at least there's a long history of considering gold to be upscale and expensive.
One of the key attractions of both gold and bitcoin is that they exist outside government's control.
Honest, idealistic libertarians prize that characteristic. So, unfortunately, do people in the dark economy – tax evaders, criminals and anybody trying to evade currency controls.
To be sure, the dark economy has never been able to make much use of gold because the metal is too heavy and too noticeable to be attractive to people who are trying to avoid detection. However, bitcoin seems ideally suited to people skirting the law.
For those rebels, the digital currency offers the online equivalent of a shadowy alley. A public register records every transaction, but participants are identified only by strings of letters and numbers that aren't linked to specific users.
Bitcoin enthusiasts play down or even deny the criminal aspect of the cryptocurrency boom. However, the Australian Criminal Intelligence Commission doesn't seem so convinced. It reported in August that "virtual currencies, such as bitcoin, are increasingly being used by serious and organized crime groups as they are a form of currency that can be sold anonymously online, without reliance on a central bank or financial institution to facilitate transactions."
For now, anyway, the dark economy has to be counted as one of the possible factors supporting the recent run-up in many cryptocurrencies.
One of the prime functions of a currency is to store value. Gold enthusiasts laud the metal's supposed ability to maintain its worth even during times of economic stress. In contrast, bitcoin, which launched in 2009, has seen its price soar, then plummet, then soar again.
But is that a feature or a bug? If you're seeking to protect your wealth, gold may be your preferred choice. However, if you're a momentum investor or simply an active trader who sees big price swings as an opportunity to make money, bitcoin is undeniably attractive.
Advantage: It depends
So what's the conclusion? Gold, despite its old-fogey status, appears to have several telling advantages. Its appeal is not going to go away. But it lacks a compelling story right now. In particular, its lack of yield makes it an also-ran at a time when interest rates are on the rise.
In contrast, bitcoin has its own selling points, not the least of which is promoters' ability to construct a compelling narrative around such a little understood asset. On the other hand, the most obvious threat to its current rise is the possibility that governments may crack down on its use because of its dark-economy potential.
Those who want a chance to cash in on today's hottest trend may want to gamble on bitcoin climbing even higher. But those who want to protect their wealth from future shocks should probably choose a different path.