Are bitcoins a modern-day substitute for gold?
Unless you have been living on a different planet you will have heard of bitcoins. You may not necessarily understand what they are but you will know that they are a form of digital money. So what more do you need to know?
Here’s the definition:
‘Bitcoins are a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.’
The last point is the most interesting, that they operate independently of a central bank. I will come to this in a minute. We have all seen the effects of the lack of money in Greek banks. People have been limited to withdrawing 60 euros. When the same happened in Cyprus a few years back people were limited to 300 euros; this is how badly the Greek banks were suffering. So what do you do when you can’t get your own money out of a bank?
This is why traditional ‘safe havens’ like gold were always popular. Gold is a physical commodity with an intrinsic value that people were happy to take in exchange for payment, the original idea behind paper money and the gold standard. However, gold has struggled to maintain its highs of $1900 and now looks more and more likely to have nearly halved as we push ever closer to $1000. So what, if any, is the alternative?
Bitcoins, existing online without the need for central banks, have been seen to be an answer both to physical currencies and as a viable substitute for gold. And recent events in Greece have seemingly proved the need for this alternative.
The rapid deterioration of the Greek financial system meant that bitcoin soon became a real way of people getting their hands on funds and bypassing the banks. Bitcoin machines started to appear in public places in the country. This of course led to a spike in the value of bitcoin.
Current drawbacks of bitcoin
The problem with bitcoin is that, without regulation and the ability to be recognised (like gold) as a true global commodity, volatility is hard to gauge. We have seen similar moves in bitcoin to those in gold but over a matter of days rather than years. This means that as ‘investments’ go, bitcoin holds a very high risk.
My own rules of trading revolve around my 80/20 split: markets move 80% of the time due to technical factors and 20% of the time due to fundamental news. I would say due to the infancy of bitcoins in their case it’s the opposite. News makes people trade bitcoin.
When the Greece rumours first started to circulate, people flocked to bitcoin as an alternative to gold, the euro and other currencies. Here is the chart leading up to the ‘resolutions’.
As we moved through May and the worst of the negotiations the value of bitcoin rallied. As we can see, at the end of the chart, when the bailout agreement was being made, the price of bitcoin sharply drops.
Bitcoin certainly has a place in the future world of currency, filling a space not covered by gold or traditional currencies. Until bitcoin is regulated, however, and held at an institutional level, it will not be a viable trade, in my opinion. As things stand, trading on bitcoin is simply a punt on the news.
Chief Market Strategist
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