As soon as the U.S. dollar and its tie to gold was cut off the world found itself sitting in fiat currencies.
Central banks have spent the latter part of five years imposing almost zero-rates of interest in order to increase real estate prices as well as stock and bond prices. These actions have made it incredibly difficult for anyone saving to receive good returns. In addition to this the security of financial transactions has been compromised by government surveillance. Bearing all of this in mind there are some private citizens who have sought a way to save money through investments in gold. But now the question has to be asked: is it better to move to bitcoin?
Traditionally there are investors who turn to gold as a way to privately transfer wealth and protect it. Historically, investments in gold were meant as a way to protect against losses from more volatile assets such as bonds, equities, or real estate. Gold was also used to hedge against inflation that would otherwise raise or lower the value of stocks or bonds. However the protections that were once afforded by gold have been eroded by manipulation, regulation and monitoring. One of the main competitors associated with gold over the last two years is the arrival of digital currencies like Bitcoin.
What is Bitcoin?
Bitcoin is a system of transferring Bitcoins in the same manner as on-line banking transfers virtual dollars. i The difference is that Bitcoin does not rely on a central authority to hold all accounts and account balances. Now bear in mind this currency is based on SHA-1 (cryptographic hash function) for security purposes. This was designed by the NSA - the same NSA that purposefully created backdoors into everything they designed and spy on the world. Now bearing in mind that potential for security breaches the value of bitcoins is that they are in limited supply and they are useful.
The creation of these virtual coins needs to be limited in order to give the currency value. The coins have to be mined into life, as it were, adhering to mutually agreed upon rules. A user runs software which searches for a solution to a math problem that is quite difficult. The difficulty of the math problem is precisely known. The difficultly is regularly adjusted in an automatic fashion so that there are a constant number of solutions found each hour: 6 solutions per hour. This means that anywhere around the world where people are mining for a solution only six will be found each hour. When a solution is found it is packaged into a block. A block represents 25 new Bitcoins as of late. The amount - which is referred to as the block reward - is the incentive for people to do the hard computer work required finding new solutions and generating new blocks. Every four years the number of mined Bitcoins in a block reduces by 50%. The original black reward, which was halved at the four year mark in November of 2012 was 50 Bitcoins. Any block which does not follow the rules is rejected by everyone. This means that overall there can exist no more than 21 million Bitcoins. Due to the fact that the block reward decreases with time, miners will eventually pay for the electricity costs and hardware required to mine by collecting a transaction fee. The transaction fee is the only thing to encourage miners at this point in time to create more Bitcoins.
Disadvantages to Bitcoin
Bitcoin has some disadvantages. The price or the perceived value of a Bitcoin has always been and continues to be extremely volatile, making it difficult to assess its real value. This makes investors who are interested in the cryptocurrency very leery because they could buy $10,000 of Bitcoin today and a month from now it could be worth $50,000 or it could be worth only $5,000. This extreme fluidity and instability causes many investors to think again about investing in Bitcoin. The simple truth that Bitcoins is a virtual currency and that it exist only in digital form means that they are very vulnerable to loss. Without a tangible item to hold onto and to see, theft and loss can be very prevalent. Losing the Bitcoins could be as easy as someone hacking the computer they are stored on and empting the wallet. This is a big issue that Bitcoins need to overcome. If Bitcoins ever did become controlled by the governments, then regulations could be passed that would severely restrict Bitcoin usage. This could cause some purchases to no longer be viable and those who have bought into Bitcoins may find themselves with thousands of dollars in the virtual currency that they cannot spend due to the regulations and controls that get passed. If people who have Bitcoins cannot use them, the novelty will wear off and the Bitcoin craze will quickly die out.
These online currencies may be insulated for now against manipulation from central banks and governments but that may not always be the case. In spite of the popularity of Bitcoin it would stand to reason that the demand is not all it is cut out to be. It may have temporary promise but it is not a viable long term alternative to gold investments. Having said that if the western governments do not crack down on Bitcoin and instead embrace it as a digital currency for the internet, well.. then Bitcoin has a bright future ahead.
Is it the "new gold"?
Gold has been around for a very long time and there's no doubt that gold and precious metals will continue to be the favored hedge assets against fiat, inflation, war, and debt. It's a good idea to have physical gold and silver as a backup regardless of the current price. If you don't and something happens, such as the USD is devalued by 50%, or the Euro zone breaks up, then there won't be enough time for you to purchase physical gold as it will have been gobbled up by the governments and big investors around the world. There just won't be any gold left to sell till it is mined again and most likely at that point mined direct into central bank vaults.
Bitcoin is not the "new gold". Gold and Bitcoin are both useful but in their own way. Physical gold is the ultimate safe haven asset when confidence in the major world economies start to unravel, and Bitcoin is a useful and anonymous currency that you buy things with online. The beauty of the Bitcoin is that it is anonymous and you can easily trade it for dollars or even gold.
Have a look at the outstanding growth in value of Bitcoin in the below chart by Zerohedge. Late in 2013 it briefly became more valuable than an ounce of gold.
i) WSJ.com. Should You Invest in Bitcoin?