Bitcoin – Gold’s friend or foe?
With Bitcoin prices going to the moon, at last look around $2700 per coin, and gold (and silver) unable to go anywhere, and languishing way below their all-time highs (34% in gold’s case, and 65% in silver’s case) after six years; one must wonder if any of this has to do with Bitcoin, and other cryptocurrencies.
Let’s examine gold, and the possible reasons it has done so poorly these last six year:
(please note I am not going to discuss the bullish/bearish fundamental reasons for gold (debt, QE, negative interest rates, political unrest…) nor will I touch on the manipulation debate in this article.)
There is a whole generation (or two) that grew up in a monetary world where gold has been thought to be a barbaric relic. It has not been used in everyday life in years. It is no longer considered money. It is not used in everyday transactions, no one goes to their grocery store and plunks down a silver coin for a frozen pizza.
Can you blame them if they have no idea what gold is, how it functions in the world, and what its role is in an economy?
It equivalent to today’s teenagers that never have seen a pay phone. They have no idea what it is.
So, we have an entire generation brainwashed into believing that the paper they hold in their wallet is normal. They have no use for gold, they have no affection for it, they have no loyalty to it.
This is no small obstacle to overcome.
I have a friend in his mid-twenties. He has no idea about gold. Him and his buddies are stock guys. They get stocks, they don’t get gold. They don’t understand it, they don’t care to. They have been brought up in a culture where only stocks (and real estate and bonds) are considered legitimate investments.
They have no use for gold.
This is not to say this is like this all over the world. China and India value gold. They know and appreciate its intrinsic value. However Indian brides and Chinese housewives are not going to be enough to propel gold back to its all-time highs. In addition to that, they are bargain hunters and will never chase price.
This generation has been brought up on all things electronic, all things digital. They have been raised on social networking and cell phones.
It is only natural then that this generation would be enamored with Bitcoin and gravitate to it. They get it. They are comfortable with it.
So, this has become a tremendous competitor for gold, and a huge headwind.
You can sum it up succinctly – who needs gold when we have Bitcoin.
And make no mistake, Bitcoin has a lot to offer. Bitcoin has almost all the properties of money, the block chain technology is a new paradigm here to stay, and it cannot be debased and printed to infinity like the US $.
However, it does have some serious drawbacks that should raise some red flags.
Obviously one can see is that all it takes is a new, better cryptocurrency to knock Bitcoin off its perch and make all the coins a lot less valuable.
Or what if when all the Bitcoins are used up, they simple come up with Bitcoin 2.0, change the algo and start producing more. These are questions whose answers only time will tell.
Of course, if the internet goes away say good bye to your Bitcoin.
You say that’s impossible. I say just watch.
Now does a rising Bitcoin price help or hinder gold.
I think in the short run it is hindering gold.
Crypto currencies provide an alternative to not only fiat currency, but gold as well.
As long as Bitcoin continues to shine, I think gold will lag.
However, Bitcoin is shining a light on this paper Ponzi scheme.
Even ordinary citizens are starting to hear about Bitcoin, and are starting to question the US $ as a store of wealth and a safe haven.
So, ultimately Bitcoins rise could help gold.
Also remember, no matter what the technology, no matter what the asset, at the end of the day it is still a market.
If Bitcoin prices get too high, and beyond the reach of the average investor they will look elsewhere.
At that point, the beaten down gold and silver space can start to get a bid. If they do gold and silver can really take off and surpass Bitcoin. Time will tell.
It is understandable that gold and silver investors are disgruntled and disappointed as they see Bitcoin soaring to new heights every day.
Whether or not this changes remains to be seen.
In the meantime, it does make sense to own a few Bitcoins.
You might need to wait for a pullback first.
Right now the market looks like it could be a bubble.
If the price comes back down that would be the time to get in.
That way even if gold and silver continue to languish you can take some solace in knowing your Bitcoins are appreciating.