Cryptocurrencies Confront Gold’s Legacy

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Cryptocurrencies as an asset class have been on a tumultuous journey of late. Disorder and volatility followed by high profile cases of fraud have cast doubts on the viability of the asset class. On the other hand, having recently taken its latest step in the path to maturity, following the recent approval of the spot Bitcoin ETF, things are looking up for crypto. But while this asset class moves quickly it is still a nascent financial product whose role has not been full defined.

This has not stopped commentators making comparisons with other asset classes. Cryptocurrency has ‘currency’ in the name and, in many instances, is used as a medium of exchange. Questions remain as to whether it can be considered a store of value, the other necessary component to classify it as a currency, due to its volatility. It is instead with one of the oldest asset classes that most comparisons are now made: gold.

Gold is a precious metal which has formed the foundation of currency systems around the world but is now trading as a currency-like commodity. Its 2,500-year history is at the heart of financial systems and is central to the trajectory of world history. In more recent history, gold has been critical to the formation of state-finance, as a peg to the major currency of the time, pound sterling. After the wars of the 20th century and the changing of the world order the gold standard came and went and came again, this time underpinning the value of the US dollar. It was then replaced by a system of free float exchange rates, leading to the currency markets as we know them today. Through this journey, the role of gold has changed but its constant presence has remained.

Cryptocurrencies are the antithesis of state-finance, providing a de-centralized means of exchanging value beyond the control of one organization, such as a central bank. Although projects to establish central bank digital currencies could see a fusion of DeFi and CeFi. It is the use of cryptocurrencies as an alternative to currencies that draw most useful comparison, with gold acting as a hedge against currencies to which it is no longer formally linked. We are yet to fully understand the extent of the impact of cryptocurrencies but an assessment of how the asset class compares to one of the oldest will help to define its role in markets.

Integral has a long history as a trusted partner supporting banks and brokers in foreign exchange and metals/commodities, and we’ve extended our technology to support cryptocurrencies and digital assets as we recognize the future importance they will play in financial ecosystems. With this perspective we have explored the comparisons between gold and cryptocurrencies exploring what this means for the underlying market mechanics. Read more of our insights into the structural dynamics and parallels between gold and cryptocurrencies, by downloading the full paper.

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