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While many crypto investors have coined Bitcoin as the world’s “digital gold,” others are growing uncertain of Bitcoin’s value.
Howard Wang of New York-based Convoy Investments LLC and Jeremy Grantham of GMO LLC have analyzed Bitcoin’s advance relative to past frenzies and concluded that it’s unsustainable, which was noted in a recent Bloomberg article.
In a letter to investors sent out on January 3, Grantham summed up his concerns over Bitcoin saying, “Having no clear fundamental value and largely unregulated markets, coupled with a storyline conducive to delusions of grandeur, makes this more than anything we can find in the history books the very essence of a bubble.”
However, it is still too soon to tell if the “Bitcoin bubble” will indeed burst. What has become clear though, is that Bitcoin should not be considered a safe-haven asset.
I say this as I examine a chart complied by the data visualization site HowMuch, which displays an illustrative table of all the “horrific Bitcoin crashes” that have occurred since 2012.
Looking at this chart, it appears that Bitcoin lost 83% of its value in just three days between April 10, 2013 to April 21, 2013. Bitcoin’s next biggest crash occurred just recently, losing 70% of its value from December 2017 to February 6, 2018.
Now, compare this with the price of gold. According to data from the London Bullion Market Association, the price of gold appears fairly steady from day-to-day.
Considering this, Bitcoin investors and holders might find it interesting to know that major precious metal retailers have started accepting Bitcoin payments for gold, silver, platinum and other products from various mints. For example, APMEX Inc., one of the largest online retailers of precious metals, recently began accepting Bitcoin payments through the Bitcoin payment processor, BitPay.
Ken Lewis, CEO of APMEX, told me,
“As we are probably all aware, Bitcoin prices have surged in the last year, seeing an overall increase of nearly 1,200% in 2017. Investors started getting excited about Bitcoin and many casual traders even got involved with the cryptocurrency. Relative to Bitcoin, precious metals prices are far more stable, with Gold seeing just over a 12% increase in 2017 (Silver up roughly 5%). While people are obviously still highly interested in Bitcoin, many are turning to precious metals for a more, in a sense, secure investment.”
Moreover, it seems like the concept of using Bitcoin to purchase gold is catching on. APMEX reported that 55% of Bitcoin buyers are new customers, which is two times the company average across all other payment types. APMEX has also noted that transactions made with Bitcoin tend to be 3 to 6 times higher than average purchases, with a high concentration in gold products.
Consequences of Swapping Digital Gold For Real Gold
Clearly, there is a desire for Bitcoin holders to swap out “digital gold” for the real deal. However, there are also consequences that could impact the entire cryptocurrency ecosystem.
While using Bitcoin to buy gold presents investors with a great option to diversify their portfolios, the Bitcoin bubble could potentially burst if more people start to use Bitcoin to purchase gold.
It’s important to mention that holders with large amounts of Bitcoin are known as “whales.” These whales are essentially the ones in control of the Bitcoin market and can cause Bitcoin prices to plummet by selling even a small portion of their holdings.
That said, what would happen if these investors start to use their Bitcoin to buy gold? This could potentially result in another major Bitcoin crash. And if whales, investors and other holders cash out their Bitcoin for gold, it could also present a clear indication that the value of Bitcoin is depreciating. In turn, the value of gold would increase, while downward pressure is put on Bitcoin.
Yet, Anything Is Possible
The good news is that anything is possible when it comes to the crypto market. The volatile nature of Bitcoin has resulted in both major wins and losses for investors. Adding gold to the mix just happens to make things a bit more interesting.
For instance, while some Bitcoin holders might jump at the chance to use Bitcoin to buy gold, others will continue to hold onto their digital assets. An article recently featured on Fortune takes this stance, explaining how some investors are actually trading in gold for Bitcoin.
San Diego resident, Byron Salamida, was interviewed, explaining his motivation for using gold to buy Bitcoin.
“Why keep something in gold? It’s stable. But why keep it in gold when it stays in a $100 range, when I could buy Bitcoin when it is increasing everyday?” Salamida said.
Overall, both gold and Bitcoin are valuable assets. However, gold has been a safe-haven asset for centuries. Bitcoin remains volatile and is indeed a risky investment. Given the circumstances, it’s up to investors to decide what works best for their financial strategies - but it’s always good to have options.
