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MORGAN STANLEY: Bitcoin's long-term value relative to gold will come down to a matter of trust

Jack Guez/AFP/Getty Images)

Bitcoin’s explosive rise in value is driving an increasing number of investors to better understand cryptocurrencies.

Does it represent more of a finite storage of value like gold? Or will it develop into a fully-liquid means of exchange like traditional fiat currencies?

Morgan Stanley analysts Tom Price and Susan Bates tackled the question in a research note called “Gold vs Bitcoin”.

They identified some similarities between the two, but also cited the risks around cryptocurrencies stemming from low barriers to entry and the immaturity of the market (Bitcoin is eight years old) relative to gold.

One aspect that is no longer similar is the price index of the two assets, following Bitcoin’s steep appreciation this year.

This chart shows the difference in growth since 2014:

Does Bitcoin fit the criteria of a legitimate currency? Price and Bates think so.

“Both gold and bitcoin possess the properties of a viable currency: a widely accepted medium of exchange; are fungible, durable, portable, divisible and scarce,” they said.

However, they wrote that Bitcoin has an added benefit – its platform allows for the instant transfer of value worldwide. As a physical commodity, gold doesn’t have that capability.

In that sense, Price and Bates argue that Bitcoin is more similar in nature to the world’s major trading currencies.

They also said that the technology behind Bitcoin effectively provides a legal framework, “in this case, not by government, but certified by network nodes and recorded in a public ledger ‘blockchain'”.

Blockchain itself isn’t specific to Bitcoin – it’s a form of digital technology that enables every transaction on a given network to be recorded, approved and logged.

In the case of Bitcoin, the blockchain provides a digital ledger for every transaction.

Once a transaction has been approved, it’s logged on the network and can’t be changed. In effect it creates a digital log of every Bitcoin transaction that can’t be duplicated and is visible to everyone, thus increasing transparency.

In comparing Bitcoin to gold, the analysts expressed the optimism shared by many about blockchain technology — its capacity to both speed up transactions and reduce costs.

“For global money transfers – bitcoin’s a good medium,” they said. “Indeed, for this function, bitcoin’s better than gold; probably better than conventional fiat currencies too.”

They also said that Bitcoin’s finite supply could help underpin its value. There’s only 21 million Bitcoins that can be mined by 2140, of which around 16 million are in circulation.

However, the analysts outlined two notes of caution for the future success of Bitcoin (and other cryptocurrencies).

First, they highlighted the relative immaturity of the market. Bitcoin’s popularity this year has seen an explosion of new cryptocurrenices issued in Initial Coin Offerings (ICOs).

The new market is in somewhat of a frenzy, with the constant introduction of new ICOs. However, Price and Bates noted that the dynamics of the market create no barriers to entry, which could present a threat to Bitcoin.

“If bitcoin is successful long term, we should continue to see competitor cryptocurrencies and market strategies emerge to exploit the new economic rent,” they said.

They added that Bitcoin’s true test is whether it can build up trust among consumers across the globe as a viable means of exchange.

Noting that Bitcoin was only created in 2009 while gold has been established for thousands of years, they said that such a standing in the global marketplace can only be realised over time.

“Bitcoin is the latest money to offer gold’s long-standing capabilities and some other unique benefits,” they said.

“While it too may somehow undermine gold’s demand outlook, the rate and scale of the shift depends on the willingness of investors to engage bitcoin and other cryptocurrencies. And willingness first requires a time-consuming, trust-building exercise.”

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