Money Observer: Bitcoin’s rise causes gold demand to slump

Over the last 12 months, the number of first-time precious metal investors has fallen by 20 per cent, according to BullionVault, an online marketplace for metals. Meanwhile, the number of internet searches for ‘buy bitcoin’ overtook the phrase ‘buy gold’ in the month of November.

The price of a bitcoin exceeded the value of an ounce of gold for the first time in March, and now it is about ten times the price of gold, having jumped the $11,000 barrier for the first time in late November.

Only Germany’s investors bucked the trend and used gold’s recent weakness as a chance to invest: the number of new gold investors from the Eurozone’s largest economy rose by 10 per cent over one year, according to BullionVault.

This month, bitcoin continues to scale new heights and currently stands at $11,803, which means it has returned some 1204 per cent since the beginning of this year.

It may therefore not come as a surprise that investors are turning away from the traditional store of value that is gold, preferring to get a slice of the spectacular but unchartered rise of the cryptocurrency – but how wise is that?

Some have attributed bitcoin’s dramatic rise this year to a surge of demand in China, where the government has previously warned that the digital currency is being used to channel money out of the country.

Many investment experts fear that bitcoin has created a bubble, comparing it to the Dutch Tulip mania of the 17th century, when the price of trendy tulips reached extraordinarily high levels and then drastically collapsed.

Credit Suisse chief executive Tidjane Thiam recently described the digital currency’s stubborn ability to attracting investors as the ‘very definition of a bubble’ because ‘the only reason to buy or sell bitcoin is to make money’. But it remains to be seen how much further bitcoin can rise.

In October, a six-storey London mansion went onto the market with the caveat that the owner-to-be forks out £17 million in bitcoin. And in November, the CME and Chicago Board Options Exchange announced that they intend to start trading bitcoin futures.

‘Whether or not bitcoin ever achieves common use as money, the cryptocurrency plainly offers investors a hot speculation and not a safe haven right now,’ says Adrian Ash, director of research at BullionVault.

‘Bitcoin’s fresh record highs have come alongside new highs in the stock market, led by stretched valuations in tech shares. The ultimate investment insurance of physical gold, in contrast, is trading flat in line with its five-year average.’

He points out that German investors have so far used this opportunity to start building their gold holdings, and others might follow. But for now, it seems that investors are warming to the cryptocurrency instead.

‘Some investors like gold because it is hard to find and expensive to mine, so supply grows only slowly, in theory,’ says Russ Mould, investment director at AJ Bell. He argues this is a marked contrast to the global money supply, where central banks have pumped more money into the economy via quantitative easing; it also makes it easy to see why some investors might consider bitcoin to be a direct alternative to precious metals.

However, he points out there are important differences between the two: gold has been accepted as money since time immemorial, while acceptance of bitcoin remains limited. Gold does not show anything like the price volatility we are seeing in bitcoin. And gold does have industrial and other uses, such as jewellery, whereas bitcoin does not.

Further, bitcoin is not a commodity in the classic sense, as its use does not facilitate the creation or production of anything else (unlike oil, steel or cotton) and it has no physical form. As such, Mould maintains traditionalists will argue that gold is still the better option. Meanwhile, crypto-sceptics will also ask – what exactly is bitcoin?

‘Its origins lie with currency, but its limited acceptance and price volatility are question marks here,’ says Mould. ‘And it is hard to argue it is an investment when it generates no cash, so it is nigh-on impossible to value, even if it has a traded price.’

What is Bitcoin?

Bitcoin was invented in 2009 by Satoshi Nakamoto. To create bitcoin transactions, a process called ‘mining’ takes place, which involves computers solving a difficult mathematical problem with a 64-digit solution.

Crucially, the supply of bitcoins is capped at 21 million, which explains why some see the cryptocurrency as an alternative to precious metals and a potential store of value. Currently, there are about 16 million bitcoins in existence.

While the Treasury and the EU announced plans to regulate bitcoin, it is not currently regulated, and it is beyond the control of Central Banks.

This article was originally published in Money Observer on 6 December 2017:

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