Bitcoin’s historical moment happened this month as its price shot past the price of an ounce of gold. Gold’s value has been rather stable for years, while bitcoin traded below gold since the end of 2013, but went on a rising trend in mid 2015 and crossed the $1,000 mark in January this year. Its value slumped in March as an EFT was rejected the right to trade it on Bats. However, it bounced back pretty quickly.
REASONS FOR RALLY
As bitcoin enthusiasts celebrate, sceptics may advise caution and point to its volatility. An important factor for the bitcoin rally may be in China where government capital controls drive people to rely more on this decentralized cryptocurrency for international investments.
Still another reason could be a general feeling of global uncertainty brought about by Brexit, Trump election and possible shock elections in Europe to come, which makes the traditional investments less attractive. Maybe this made it the best performing currency of 2016.
On a more speculative note, one can even suggest the bitcoin rally is due to the global war on cash which makes people shy away from debit and credit cards, and turn toward bitcoin and other cryptocurrencies in order to retain some anonymity. India’s debacle proves this kind of policies should not be taken lightly.
Anyway you look at it, the bitcoin story is gaining traction, but sceptics still see it as a market for speculators. They point to its lack of stability and durability that gold and silver display in centuries. But let us not forget that bitcoin is still in its early stages and many financially successful stories of today had a troubled past. While the rejection by SEC may be regarded as a setback for some, others may look at it as a desired continuation of operation outside governmental control.
One thing bitcoin and gold have in common is limited supply, which may lead us to argue that bitcoin could be used as a proxy of gold. However, it is precisely its limited supply, mimicking the Gold Standard of the 19th century, which some critics regard as disadvantageous. They argue that industrial economy that needs growth cannot grow under an exogenous quantity of money, meaning that in a growing economy the rate of purchased goods and services will eventually outpace the rate of increase of supply of bitcoins. This will lead to debt-deflation and depression as debt stays in place even if all prices fall.
There is also the issue of security as the Mt. Gox experience reminds us. Digital currency is vulnerable to hacking, although some believe the Mt. Gox’s bankruptcy should be chalked up to poor management of its CEO and major stake holder. More recently, millions’ worth of bitcoins were stolen from an exchange platform in Hong Kong, which caused a bitcoin slump. Entrusting your bitcoins to an unregulated bank is risky, so an approval by a regulatory body could mean a substantial boost in confidence. Approval or not, improvements in security are being worked on even now. Bitcoin’s potential should be imagined in a longer time frame, such as decades, and this is just a beginning.
Contrary to the popular opinion, the use of bitcoin can leave a trail due to its associated data. As inventors struggle to devise new ways of financial anonymity, the authorities try to keep pace. It remains to be seen how authorities will solve the tension between the need for anonymity and demand for transparency if bitcoin ever gains regulatory approval.
Given the fact that bitcoin has proven resilient to a number of shocks and capable of bouncing back, we may conclude investors are not likely to give up on it. Regardless of the SEC approval, it is likely to remain an interesting alternative in uncertain global conditions. But it should not be treated as a gold proxy.