Question

You are an investment bank analyst who oversees the cryptocurrency market. Your job is to produce a comprehensive report to help external stakeholders (e.g., policymakers; institutional clients, etc) to understand the investment perspective of cryptocurrency. While many experts argue that cryptocurrency such as Bitcoin shares very similar features to Gold (store of value and being resistant against inflation), some others insist that cryptocurrency has no value at all. The key issue to address in this report is whether cryptocurrency is really like ‘Gold’ so the cryptocurrency can store the value. The report should be self-contained, which means the external stakeholders can understand the key reasoning and your recommendations through your research, quantitative analysis, and discussion. The key tasks that the report should cover are:

Answer 1

Cryptocurrencies can serve as a store of value but differ from gold in universal acceptance and use in common transactions. They are subject to market supply and demand and need to satisfy the roles of store of value, unit of account, and medium of exchange to be compared to money. However, the volatility and limited everyday use make them distinct from traditional stores of value like gold.

Step-by-step explanation:

Understanding Cryptocurrency as a Store of Value Comparable to Gold

In the context of investment and financial analysis, comparing cryptocurrency to gold in terms of its capacity to function as a store of value is a nuanced endeavor. Unlike fiat currencies issued by governments, cryptocurrencies such as Bitcoin are maintained in a decentralized manner. Their value is dictated by supply and demand forces in the market, which can be influenced by government regulations to a certain extent. However, for a cryptocurrency to be considered as money, it has to satisfy the roles of a store of value, a unit of account, and a medium of exchange.

Gold has historically fulfilled these monetary roles due to its inherent value and acceptance over time as a commodity money. Similarly, some argue that cryptocurrencies share these features -- being resistant to inflation and serving as a store of value. Nonetheless, when evaluating cryptocurrencies as potential investments, stakeholders must consider their relative lack of acceptance for everyday transactions, such as purchasing groceries or paying rent, which is more common in fiat currencies and traditional stores of value like gold.

If we consider the attributes that make gold a reliable store of value -- scarcity, durability, and universal acceptance -- cryptocurrencies meet some but not all these criteria. While they are indeed scarce and durable in the sense that they cannot be arbitrarily replicated or degraded, their acceptance is not yet universal, and their use in everyday transactions is limited compared to fiat currencies or gold. Additionally, the volatile nature of their value poses significant risks as compared to the stability traditionally associated with gold.

Therefore, while cryptocurrencies may share some characteristics with gold and possess unique advantages due to technological innovation, they currently do not function equivalently to gold in many respects critical to being considered a stable store of value.