LONDON (MarketWatch) — What is the biggest long-term threat to the price of gold?

You could argue it is rising interest rates, which will push up the cost of holding an asset that doesn’t earn any kind of return. You could argue that it is deflation: If prices start to fall, then paper money will look a lot more valuable. Or you could argue it is a resurgent dollar DXY, -0.18% . As the American currency grows in strength — as seems likely given its relative performance compared with the rest of the world — then gold will be less valuable as an alternative.

In the short term, those factors will all have an impact, and may well explain the huge drop in the gold price US:GCQ3 over the last three months.

Bitcoins Shutterstock.com

But in the medium to long term — and gold is nothing if not a long-term investment — the most important threat is the rise of alternative digital currencies such as bitcoin. Why? Because as a rival to paper money, gold has had the market to itself. Now it will have competition, and that always drives down the price of any product.

Gold has been on a roller-coaster ride over the past three years, even by its own volatile standards. Back in 2011, it soared close to $2,000 an ounce as it looked as if the euro EURUSD, +0.07% was in danger of imminent collapse. Since then, it has dropped all the way back to between $1,200 and $1,300. In the last three months it has seen some dramatic one-day falls, enough to take the metal into bear-market territory.

That is all the result of short-term factors. The euro crisis has calmed down. Central banks look set to turn off the supply of printed money. The dollar is getting stronger, and inflation shows little sign of emerging anywhere. As investors reckon the global economy is getting back to normal, they want to own less gold, and that has driven the price back down.

None of that means very much. Prices always go up and down. In the background, however, digital currencies are rising all the time, and that will be a lot more significant.

True, bitcoin has a long way to go still to establish itself as a serious currency. The digital money is still in its infancy. It is a wild and unregulated asset, with about as much credibility as the Zimbabwean bond market. But it is slowly and steadily making progress from the fringes to the mainstream of the financial world — the Winklevoss twins’ proposal to create an ETF that tracks the bitcoin price is just the latest example of that.

The bull cases for Japan and gold

Even if bitcoin crashes and burns, that doesn’t mean digital currencies will not be successful.

Netscape created the first popular Internet browser, but it didn’t ultimately capture that market. In technology, the pioneers are not always the real successes. Financial sophisticates might dismiss digital currencies as a craze. But plenty of other industries have been taken apart by the Internet — there is no reason why the money market should be any different. We don’t listen to analog music, or read paper books, or send letters any more — there is no reason why we should use paper money supplied by a central bank. It may be some other company that cracks the mass market, but the chances are it will happen.

That has big implications for the gold price.

The key argument for owning the precious metal is that it is the main alternative to paper currencies. You can argue about whether that is necessary or not — plenty of people agree with the British economist John Maynard Keynes that it is a ”barbarous relic.” That doesn’t matter, however. The fact is some people — including a lot of central banks — believe that gold is an alternative to paper money and buy it for precisely that reason.

In the past, silver and a few other precious metals provided some competition, but by and large gold has had that market to itself. If you just wanted a reliable place to stash your cash, you had two options — deposits in banks in a currency controlled by governments, or else gold. There wasn’t anywhere else to go.

But new digital currencies such as bitcoin are explicitly designed as an alternative to paper money — and indeed largely mimic gold in their limited supply. Of course gold has been a medium of exchange for a few thousand years — and bitcoin for about five minutes. Still, as it and its rivals grow in importance, gold will have a genuine competitor.

In many ways, digital currencies may be a better alternative to paper money than gold. They are designed to have a permanently finite supply, so no one is going to suddenly start finding a lot more of them (whereas there is a heck of a lot of gold in meteorites – and some companies have already started working on ways to go up into space and get it).

Bitcoins are less likely to be manipulated by governments or banks. They are purely digital, so despite the efforts of governments to control or tax them, the chances are they will escape any supervision. They are not controlled by anyone, so there is very little incentive to debase them. And they are hard to steal, so you don’t have to pay men with guns to protect them in deep vaults.

That is good for investors. In any market, it is always better to have a choice. Two rivals to paper money are better than one — and three would be better still.

But it can only be bad for the gold price. If it is not an alternative form of money, then gold is just a decorative metal, good for making necklaces and not much else. And its price will start going down. That moment may be some way off, but anyone buying gold for the long-term needs to be thinking about the threat posed by digital currencies, and maybe start hedging their bets with a few bitcoins in the vault alongside the ingots.