While the concept may still be difficult to grasp (the cryptocurrency is notoriously difficult to explain to the uninitiated), the result of its inner workings is a new status in the eyes of even the most traditional financial minds.
Bitcoin is now considered a safe-haven asset, and even a store of value for investors around the world. In countries with unstable liquidity conditions especially, Bitcoin is synonymous with safety. In the last year, it has even vied with gold for the position of “smartest portfolio staple”. But why?
The Driver of Bitcoin and Gold Value
The two things that make Bitcoin valuable are also what liken it to gold. First, Bitcoin has a limited quantity and takes work to acquire.
Just like gold must be mined, so too must Bitcoin. The architecture that the cryptocurrency is built on is called Blockchain – an extremely complicated algorithm that serves to both create new currency and allow users to send and receive it. The Blockchain algorithm must be “solved” for coins to be created – a process that involves your computer’s CPU or GPU working nonstop to decrypt large data files. The work it takes to finally unlock a single coin (or its 256-character key) gets exponentially harder the greater the number of computers there are chipping away, and when the algorithm is finally solved it will have created a total of 21 million Bitcoins. A large number, yes, but a finite one.
The second property that lends value to Bitcoin is its network security. Just like gold kept in a safe, Bitcoin cannot be taken from you if you hold the private, encrypted key. It cannot be hacked, and the network cannot be shut down – as it exists simultaneously on millions of computers at any given moment.
Bitcoin’s Latest Boom
With the instability in liquidity conditions in countries like China dominating the financial news, it’s no wonder that precious metals have seen greater support. Bitcoin, too, has enjoyed the turbulence, and even held the title of “asset with biggest increase in yearly value” for the second year in a row.
While gold has experienced declines due to its relationship with the dollar, Bitcoin’s only inverse relationship is financial instability, of which there is droves unrelated to any single currency. The result may soon be Bitcoin and gold’s “first kiss”, where the value of a single Bitcoin surpasses the value of one Troy ounce of gold.
Amidst viscous liquidity in Chinese banks early this year, it almost transpired. Bitcoin experienced moments above $1,170, as Chinese traders (among whom Bitcoin is very popular) flocked to it in massive numbers. The kiss was postponed, as long holders sold off Bitcoin for reportedly massive profits, and the value of a coin now bounces between 800 and 900 dollars. The next year however, may finally be the time for gold to bend over a pucker up.
2017 and the Bitcoin Gold Tryst
There looks to be a distinct possibility of the kiss occurring, if current trends mature as expected. Ongoing problems with Central Banks, who have in recent years ceaselessly cut interest rates and taken on debt will herd people towards safe-haven currencies. They will have few choices, gold and Bitcoin among them.
Which to choose? Those investing in gold choose an antiquated precious metal that must be held physically for a semblance of security, with an inverse relationship to the US dollar. The latter property cannot be ignored, especially with US President Elect Donald Trump’s purported fiscal changes and an almost-guaranteed series of interest rate hikes on the horizon. Smart traders looking to capitalize on both sides of the trend should short gold using one of the platforms available on this binary options review infographic.
Bitcoin, on the other hand, looks likely to claim its third year as an MVP and should be purchased using one of the popular exchanges available with a simple search. There is a plethora of information available online regarding the best exchanges to use. Start with this Coinbase review, and this BTC-e guide. Consider the exchange’s daily volume, your preferred fiat currency and daily purchase and withdrawal limits. Either way, it can’t hurt to hold both Bitcoin and gold in your portfolio, regardless of the inevitable kiss in their future.