Major milestone in sight! Cryptocurrency market cap exceeds $2 trillion, close to surpassing gold value held for private investment purposes

The total value of the cryptocurrency market is now over $2 trillion, nearly as much as the amount of gold held for private investment purposes, according to a new report released by Bernstein on Tuesday.

“Investors need to find return streams that can hedge against depreciation risk and diversify away from equity exposure at higher inflation levels. These assets (cryptocurrencies) may have the potential to serve this function,” the firm said in a note to clients on Tuesday.

Cryptocurrencies have gone mainstream with support from companies and institutional players, with investors increasingly viewing digital currencies as a reliable store of value and a way to diversify their portfolios. Bitcoin, the largest cryptocurrency, was trading around $43,300 on Tuesday, with a market value of about $800 billion, according to Coin Metrics.

But Bernstein is quick to point out that both gold and digital currencies have other uses. If gold jewelry is included, the precious metal’s market value is close to $8 trillion, roughly four times the size of the cryptocurrency market, according to Bernstein’s calculations.

There are also important distinctions between cryptocurrencies. Bernstein said bitcoin is primarily used as a store of value, while other digital currencies such as Ethereum function as more than just an investment.

Bernstein's comments echo those of some big fund managers who have noted that the ease with which bitcoin can be traded could make it more attractive than gold as a safe-haven asset and hedge against inflation.

“It’s easily transportable, and if you have a smartphone it can be sent anywhere in the world, so it’s a much better store of value than gold,” Bill Miller, founder and chief investment officer of Miller Value Partners, said in April.

“Bitcoin is much more viable than passing gold bars around,” noted Rick Rieder, BlackRock’s chief investment officer for global fixed income.

Still, questions remain about Bitcoin's long-term viability, including from a regulatory and environmental perspective. Last week, Tesla CEO Elon Musk said the company would suspend accepting Bitcoin as a form of payment for its vehicles due to "rapidly increasing fossil fuel use for Bitcoin mining," sending Bitcoin prices tumbling. Musk later clarified on Monday that the company had not sold any of its Bitcoin position, which was first disclosed in February and was worth $1.5 billion.

Looking ahead, Bernstein’s Harshita Rawat believes Bitcoin could replace gold once some regulatory and environmental issues are resolved.

“Bitcoin can be more easily used as a store of value anywhere in the world (especially in countries with unstable fiat currencies) and is very liquid,” she said, noting that the cryptocurrency has a 24/7 network and can be traded almost instantly. “As a store of value, especially in certain countries/regimes, the implications are significant.”

She said Bitcoin and cryptocurrencies in general have “reached a tipping point” in terms of “institutional/retail adoption, dollar investment, industry talent, and liquidity.”

Still, Rawat’s colleague Inigo Fraser-Jenkins isn’t sure how investors will view Bitcoin in the long term, noting that gold has a 5,000-year history, while investors have only recently viewed Bitcoin as a store of value.

He believes that it will take many years for Bitcoin to build widespread enough trust to make it a true security asset. "There are very broad economic, legal and cultural issues involved. Any claim that these problems can be overcome in a short period of time seems unacceptable because they are of a profound social nature."