The Digital Gold of the Future is not Gold!

Amar Pandit , CFA , CFP

Does this headline make sense?

It does and it does not at the same time. Anyway, let us dive into the post.

Even Gold-Obsessed Indians are pouring Billions into Crypto.

This was the headline of a recent Bloomberg column.

The column goes to say that in a country where households have more than 25,000 tonnes of gold, investments in Crypto grew from $200 million to $40 billion in the past year, according to Chainalysis, a Crypto Data, software, services, and research firm. The fascinating part is that this is despite hostility towards the asset class from the central bank and a proposed trading ban.

Another fascinating statistic was that there are now 15 million crypto investors in India. To set a context, the number of folios in mutual funds is around 100 million according to the latest AMFI Data. However, every investor is likely to have multiple folios and if we look at the unique PAN numbers as the metric for number of investors, my guess is that this number should be around 20-30 million. The number of Crypto investors is very close to the number of investors even in mutual funds. While Mutual Funds overall manage more than $450 billion dollars, the numbers on the Crypto side are growing exponentially despite not having a campaign like Mutual Funds Sahi Hai or a strong distribution footprint.

So, what is causing this?

First, nothing sells better than the price of an Asset that keeps going up (it’s going down now but at some point of time, a turnaround is likely to happen and will happen).

Second, the average age of the Crypto investor is between 18 and 35. They are digital natives and many of them live online. The network effects of Bitcoin are simply not understood by people. This is a concept that I am sketching and writing about in my latest book “Bitcoin and Crypto Made Simple”.

Third, the narrative that Bitcoin is equivalent to digital gold is appealing to many investors in the crypto world. This is because many of the properties of gold can be easily attributed to bitcoin. In addition, the shortcomings of gold such as verifying gold, storage, physical security, and transferability are well taken care of by Bitcoin. Imagine carrying several bars of gold versus several bitcoins. Just like Gold is mined by the physical act of mining (Proof of Work), so is Bitcoin mined by energy spent on solving complex puzzles by high-speed computers.

Fourth, many investors believe that Crypto is more transparent than gold and property and returns are better than gold and property. Crypto is already taking a pie from Gold and this trend is likely to continue.

Finally, the crypto markets are liquid, open 24*7 and are something that digital natives are comfortable with. The 18-35 age crowd are typically the ones who are not likely to invest in gold, but this narrative of digital gold has appealed to many of them.

So, what is the Future of Gold? Gold has a track record of thousands of years and is likely to stay even though it will not make headlines. Tim Denning calls Gold, “a heavy, expensive, underperforming fax machine”, while Robert Kiyosaki of Rich Dad fame calls Gold “God’s Money.”

What about Digital Gold of the Future?

The monetary policy of Bitcoin and the network effects created by miners, node validators, buyers, sellers, and entrepreneurs who are building for it or on top of it have paved the way for Bitcoin to take on the Digital Gold crown. Many others have tried to copy the code of Bitcoin (which is open source and available to everyone), but no one has been able to replace the ecosystem and network of Bitcoin so far.

#BitcoinasDigitalGold is the easiest and most powerful campaign for Bitcoin.

The Proof is in the numbers.

15 million Indians and $40 billion.

Imagine all of this has happened alongside regulatory uncertainties and a cumbersome user experience for investing in crypto. Imagine what would happen if the regulatory uncertainties were to be addressed and the user experience improved.

What do you think?

I would love to hear your thoughts.