Bitcoin: the new gold? – Company Community 2
In March, a Canadian put his house up for sale in exchange for Bitcoins-5,362 of them. Back then, the digital currency was trading hands at US $ 73.00, meaning the house was available for around $ 395,000. (Source: “Canadian house first on sale for Bitcoin currency”, RT.com, March 25, 2013.)
Enrollment was seen as a risky (and bizarre) idea; after all, digital currency is experimental, decentralized, and can be transferred to anyone, anywhere in the world. Until recently, it was questionable whether this currency would gain traction or not.
Because it is digital, money does not exist in a physical sense. It is also not issued by a central bank, and that could be part of the appeal; without a central bank, accounts cannot be seized or frozen. (This is an attractive point for those in Cyprus who have had 10% of all their savings and deposits seized by the government.)
The absence of an intervening central bank also means that the currency cannot be manipulated. While digital currency is regularly ‘minted’, there is a limit to what can be created; it’s to prevent inflation. There are currently around 12 million Bitcoins in circulation. After the year 2140, nothing will be struck again and the total amount available will rise to a maximum of 21 million.
However, the price of a Bitcoin can fluctuate wildly. First introduced in early 2009, the digital currency failed, hitting around US $ 14.00 earlier this year. Now the digital currency is “worth” around $ 1,080. If the aforementioned house had been sold for 5,362 Bitcoins and the owner had kept those coins, his investment would be worth around $ 5.8 million today, an attractive sum.
So, will Bitcoins become a universally accepted alternative currency, or is it the modern version of the tulip mania bubble?
Old Federal Reserve President Alan Greenspan says Bitcoins are a bubble, and for a currency to be tradable it has to be backed by “something”. That’s a bit rich considering the ease with which the Federal Reserve prints trillions of dollars in non-backed currencies. (Source: Kearns, J., “Greenspan Says Bitcoin a Bubble Without Intrinsic Currency Value,” Bloomberg website, December 4, 2013.)
Not everyone agrees with Greenspan. The Bank of America just launched a hedge on Bitcoin and said it has a fair value of $ 1,300. Wall Street analyst sees the value of digital currency surpass US $ 10,000 over the next two years, and Ron Paul believes that could destroy the US dollar. (Sources: Ro, S., “BOOM: Big Wall Street Bank Just Hedged Bitcoin and Identified Fair Value,” Business Insider Australia, December 5, 2013; “Nick Hodge: Bitcoin to Hit $ 10,000 over the next two years, ”Long Island Newsday website, December 5, 2013; Pagliery, J.,“ Ron Paul: Bitcoin could ‘destroy the dollar’, ”CNN Money website, December 4, 2013.)
Still, Bitcoins are struggling to grow. China’s central bank said last week it was banning financial institutions from using digital currency. The announcement caused the price of Bitcoin to drop from a high of US $ 1,240 to a low of $ 870.00 before recovering. (Source: Mullany, G., “China restricts the use of Bitcoin by banks”, The New York Times website, December 5, 2013.)
Thanks to the Great Recession and the Federal Reserve’s love for printing money, investors are looking for different ways to protect their capital in the event of a major market downturn or correction. With a single Bitcoin rivaling an ounce of gold, many investors may wonder if digital currency is the new gold.
Bitcoin is still in its infancy, and until the start of the year the currency wasn’t really on anyone’s radar. That’s not to say it’s not a legitimate option for speculative investors; clearly it is, as digital currency is responsible for creating many new millionaires this year with only more to come. At the same time, the currency’s volatility makes it less of a safe haven than gold or silver.
And if an objective investor watched the incredible race of digital currency over the past year, it would be difficult to conclude that this is anything but an unsustainable bubble that is ripe for some sort of correction.
When it comes to a store of value, nothing beats gold or silver.