Will bitcoin usurp gold as the world’s most stable safe haven asset? Probably not. Here’s why.
In recent weeks, the rise in bitcoin’s price has caused many economic experts to speculate on the cause of the trend – whether it is a legitimate recognition of the inherent value of the blockchain technology behind the crypto-currency, or a fragile bubble that may pop. According to financial expert Peter Schiff, the bitcoin phenomenon could easily be the “Beanie Babies” of the digital age – an inexplicable fad that promised massive returns, only to be forgotten once the mania calms itself.
Between February and March of 2017, the price of bitcoin increased nearly 30 percent, and by more than 100 percent since the beginning of 2016. Currently, the price of bitcoin exceeds that of gold. But the true difference between these two wildly different assets is the fact that bitcoin, in spite of the efforts of the Commodity Futures Trading Commission, is not a true commodity, nor are gold and bitcoin even in the same asset class.
The Difference Between Bitcoin and Gold
Many investors believe that gold and bitcoin share similar advantages. They both historically increase in value during economic and political instability. Both are attractive to buyers who distrust the monetary system. However, bitcoin’s youth (bitcoin was first introduced in 2009) makes it impossible to predict whether it can consistently act as a legitimate inflation hedge.
Gold, on the other hand, has been a store of value for thousands of years – it was first used as a medium of exchange nearly 1000 B.C. Gold cannot be replicated; its precise properties cannot be fabricated by man, machine, or algorithm. Gold is a commodity, which is defined as being a standardized asset that may be used in commerce or trade.
Bitcoin enthusiasts gravitate towards the crypto-currency because it was engineered on the promise that it couldn’t be manipulated. However, crypto-currency can be stolen, and anything that exists purely in the digital realm is vulnerable to hacking. While gold can clearly be stolen, it cannot be compromised from afar; if you have a store of gold in your possession, it cannot be intercepted from thousands of miles away.
However, bitcoin, unlike gold, is accepted as currency by an increasing number of online retailers. One cannot directly exchange gold for goods at Target, but it is possible to shop at Target, Victoria’s Secret, Home Depot, CVS, Sears, and Kmart online with bitcoin.
The major – and obvious – difference between bitcoin and gold is that gold is a physical property, and bitcoin is not. Bitcoin is a technology that is “mined” when computer programs complete increasingly difficult tasks. While there is a finite amount of gold in the world, the cap that’s been put on bitcoin – 21 million coins – may or may not hold, depending upon market sentiment.
Also, and most importantly, gold has industrial applications that bitcoin never will. It can be used in medicine, technology, and cosmetics.
Can We Afford to Go Virtual?
Bitcoin and crypto currency in general are lauded for being peer-to-peer, largely unregulated, secure, transparent, and dependent upon the unimpeachable realities of mathematics. However, the fact is that very, very few people truly understand how it works. Most know that it’s an electronic transaction between private bitcoin “wallets”, and the transaction is anonymous, but the finer – and more important – points, remain a mystery to nearly all but the most tech-savvy. Now that bitcoin values are at unimaginable highs, it is very likely that investors won’t seriously question the technology or any lingering flaws.
In the short time bitcoin has been in existence, it has been proven a highly valuable asset to those seeking transactional anonymity. No other generally accepted method of payment – except cash – can hide the identity of the spender more effectively. (As a result, bitcoin has become de rigueur for criminal enterprises.) However, although the transactions occur anonymously – or pseudo-anonymously – each exchange leaves a permanent data trail behind. While there is no identifying information within the trails themselves, they ultimately lead to the IP address of origin, thereby creating a record of every exchange that cannot be removed, and is visible to all.
Of course, this fact alone doesn’t mean that cryptocurrency is necessarily more unsavory than cash. Nevertheless, there are significant privacy concerns, even when taking the encryption into account. There is the very real possibility of having your records accessed by unknown parties.
However, the main reason why cryptocurrency will never offer the kind of financial security precious metals can is simply due to its lack of consistency. Bitcoin is highly volatile – the wild range of prices over the first three months of 2017 was a bottom of $600 to the current high of nearly $1,300. While speculation can be immensely profitable, it can just as easily be devastating. The sheer volatility of bitcoin makes it unusable as a long-term transactional currency. Although we might not have yet seen bitcoin’s high for 2017, it can go to zero. Precious metals will always have value.
The Bitcoin Feeding Frenzy
Although bitcoin and gold possess a few similarities, bitcoin does share one significant quality with the aforementioned Beanie Babies: their value lies entirely in the willingness of the public to purchase them. Neither product has any utility or history, and yet in each case, a noteworthy portion of the population is utterly convinced of their worth.
One of the hallmarks of a market bubble is the oftentimes irrational desire of the public to invest in it sight unseen. While cryptocurrencies are an exciting innovation, there is yet no rational reason to feel confident in its long-term viability. Nevertheless, some bitcoin evangelists have gone so far as to predict that the price could go as high as $1 million per coin.
The recent bitcoin price surge will undoubtedly cause media outlets to declare bitcoin the superior investment; after all, the lucky few who purchased them when the price was $2 per unit will see their investment soar beyond their wildest imaginations – if they managed to hang on to them.
While the cryptocurrency first gained popularity among fringe groups, today it has become almost a mainstream payment method. However, the aggressive volatility of bitcoin combined with the lengthy exchange – it can take up to one hour for a bitcoin transaction to be confirmed – might make it an unattractive risk for many retailers. Between the 5th and 12th of January 2017, the price dropped 30 percent.
The current fascination with bitcoin also begs the question: How will bitcoin fare when noteworthy competition emerges? There are already numerous forms of cryptocurrency; it’s only a matter of time before one significantly improved version reaches the public. What will happen to bitcoin investors then?
Gold: The Smart Retirement Solution
No one can reasonably predict if and when bitcoin will reach its monetary apotheosis. However, while bitcoin investors are currently reaping huge rewards, if the previous six months are any indication, bitcoin could reasonably fall to alarming lows in only a few weeks. Gold, on the other hand, offers long-term security. When combined with other tangible assets in a precious metals IRA, it can act as solid wealth protection even during periods of significant economic turmoil.
If you are interested in learning how a precious metals IRA can help you reach your retirement goals, please contact the experts at Birch Gold Group for a thorough consultation.