From Gold to Digital Gold, Investment Fund Discovers Crypto
One of the staple hedges against economic and inflationary risk is that of Gold. The yellow metal has been one of the go to assets for investors for a number of years.
It has also been the principle investment asset for the Old Mutual Gold and Silver fund. The investment fund, which manages about $220m in assets, has decided that they also want to diversify some assets into cryptocurrencies.
According to an article in Bloomberg, the fund adjusted its mandate in order to invest about 5% of its money in cryptocurrencies. This was according to the fund manager, Ned Naylor-Leyland.
Digital Gold Rush
Although the fund will only be using the profits from the cryptoucurrency investments to re invest in traditional gold, it is no doubt a positive step for adoption.
Naylor-Leyland stated that Bitcoin is"paving the way" for the eventual reintroduction of gold as a form of money. He went on to say:
Bitcoin was explicitly designed to be digital gold. So if you’re going to have a small proportion of a fund in bitcoin, it should be in a gold fund, because that’s exactly the point.
Given that the fund started investing in Bitcoin in April, it seems as if there strategy would indeed have been paying off. In April, the price of Bitcoin was at about $1,200. Today the price is over $8,000.
If one were to compare that to the staple returns of the assets in the fund, it would be quite a different picture. In April, gold was at about the same level as Bitcoin. Today it is just below $1,300. Silver did not fare that much better either.
Limitations of Supply
One of the reasons that Bitcoin can be compared to gold is because of its defined limitation in supply. There are only ever going to be 21 million Bitcoin that will ever enter supply. Gold also has a defined supply giving by the total amount that is waiting to be extracted underground.
Similarly, Bitcoin is "mined" in order to enter supply. Mining is done through computers that solve cryptograpic problems. These miners have to exert "work" and resources to the endeavour. The concept is rather similar to gold mining.
Morevoer, mining and increase in supply cannot keep going at a linear pace. There are difficulty adjustments which make mining Bitcoin harder. Just like with Gold mining, more resources are required in order to dig deeper and find more gold.
The Gold Standard
There is another similarity that is shared between Gold and Bitcoin. Both have been viewed as an alternative to traditional Fiat currency.
In fact, prior to unrestricted Fiat money printing, supply of funds was backed by a certain amount of gold. This was termed the "gold standard" and was a staple of a monetary policy for some time.
After the Bretton woods agreement, certain dollar reserves could be used to purchase gold at the officially set exchange rate. However, this came to an end in 1973.
Since the collapse of the gold standard, people have had to rely on the "promise" that the American economy will be able to honour dollar based debts. This requried a great leap of faith which was tainted by the Great Financial Crisis (GFC).
Out of the ashes of the GFC a new digital gold was born in Bitcoin. It is only fitting that it is now adopted by an unlikely ally in Gold investment funds.
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Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.