Is Bitcoin the New Gold?
Bitcoin is emerging from the fringes of the financial world to become a popular investment.
Investors are even selling up their reserves of gold to invest in the leading cryptocurrency (http://fortune.com/2018/02/08/bitcoin-price-cryptocurrency-gold-price-buy/).
So is bitcoin the new gold?
Connecting the Trends
The connection between the prices of gold and bitcoin is a relatively new one.
Since late 2017, when bitcoin prices surged, there has been a negative correlation between the two products (http://www.kitco.com/commentaries/2018-02-06/How- Correlated-are-Bitcoin-and-Gold.html).
That is to say, as the price of bitcoin rises, the price of gold drops, and vice versa.
There’s plenty of anecdotal evidence (http://fortune.com/2018/02/08/bitcoin-price- cryptocurrency-gold-price-buy/)to explain why this is happening, with examples of people selling up their reserves of gold to invest in bitcoin.
It’s easy to see why they would do this.
From November through to December, bitcoin saw a huge spike in value. It looked like it was going to be a very profitable investment.
People moved out of their safe but unexciting investment in gold, looking for a larger profit.
Then came the crash.
After increasing in value ten times over in a year, bitcoin lost half its value in just over a month.
The tracking against gold continued, and the currency retained some of its increased price, but it seemed that a bubble had burst.
As astute observers noticed, this doesn’t make bitcoin the new gold – it’s more the anti- gold.
It’s a high-risk, high-reward investment that has only existed for a decade, and whose worth and behaviour is uncertain.
Gold, on the other hand, is a safe, reliable investment that has held value since the dawn of trade.
So why is there so much attention on bitcoin?
Why Bitcoin?
Bitcoin is the first and the most famous of the cryptocurrencies.
Invented ten years ago, it provides an alternative financial system whose value is rooted in complex computer processes.
Cryptocurrencies promise an alternative to traditional fiat currency.
Their value and use is not controlled by nations and banks, but by the collective efforts of distributed networks of enthusiasts.
According to the theory, they can be used to carry out faster transactions and to free users from the bureaucracy of traditional finance.
Bitcoin itself is the most popular cryptocurrency simply because it is the longest established and most famous.
It has become the banner bearer for a wider financial movement, and this has led to a huge rise in its value.
Meanwhile, other cryptocurrencies have sprung up in its wake.
Some have turned out to be nothing but Ponzi schemes, leading to financial heartbreak for investors.
Others, such as Ethereum, a sort of smart digital contract, show more sustained potential.
Underlying Value
Behind all of these currencies is a new type of software – blockchain.
This is a way of keeping records across a distributed ledger, with each record connected to the one before, and the whole data set open to scrutiny by anyone on the system.
This interlinked record-keeping is part of its value in financial systems – records can’t be doctored, and this reduces fraud.
The other great value of blockchain is that it allows peer-to-peer interactions.
If you want to pay someone in bitcoin, you don’t have to move money between bank accounts, using data your banks control.
You can just instantly transfer the value yourself.
Investing in cryptocurrencies isn’t the same as investing in blockchain.
Most currencies use the technology rather than look to advance it, though some, such as Ethereum, have a broader technological purpose.
Advocates believe that cryptocurrencies free you from dependence on banks and states, and in the process give you more control over your own money.
Critics point out increasingly unsustainable costs in computing power, with huge banks of servers now needed to mine bitcoin.
They also highlight the risks of unregulated finance, with its dangers of fraud, theft, and financial volatility.
Bitcoin has certainly lived up to that volatility over the past year.
In the second half of 2017, it rose in value from $1,800 to $19,000, before crashing back down to $7,000 in February this year.
It currently sits at around $8-9,000.
Making the Most of Bitcoin
Cryptocurrencies, and in particular bitcoin, still have value as investments, but they’re a high-risk, high-reward option.
Prices are volatile and there’s money to be made off that volatility.
If you want to invest in bitcoin then you need to keep a close eye on the markets, buying during a dip and selling during the next upswing.
Bitcoin isn’t the new gold.
If you want a safe, stable investment, then it’s still best to stick with the classics.
But if you’re keen to free yourself from bank charges, and to be able to make fast international transactions, then there’s money to be made in bitcoin.
And given the changes cryptocurrency went through in 2017, who knows what 2018 might bring?
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
