During the year 2006, complex derivatives that held units secured on American sub-prime property, began to drop in value on rumors of instability; by 2008, the World was well into a major monetary meltdown. People lost in volatile derivatives, in equities as well as in property; confidence in fiat currencies also fell as banks and investments collapsed. Financial shares took the greatest hammering as banks and insurance companies with household names were discovered to be worthless. In periods of uncertainty investors seek to stabilise their investments; they do this by moving from unstable acquisitions into government gilts and also into gold. Gold is a particularly effective hedge against risk as it is limited in quantity as well as having uses in the manufacture of both jewelry and electronics. On 6th April 2009 Gold was selling at $880 per troy ounce; on March 31st this year it was trading at $1,290. This is a 46% increase in value over five years; the price had peaked in September 2011 at $1,864. The price of gold has traditionally been a fair indication, or mirror, of the level of instability that exists in the market.
Bitcoin has also enjoyed a large increase in value during this period. Bitcoin can be used as a currency as well as an investment; it is also limited in supply. Bitcoin is similar to gold in other respects, no one government can decide on the value of gold; the price is set exclusively by the amount people are willing to pay, it is, like Bitcoin, set by the open market. The federal government can also decide increase the stock of dollars by deciding to print dollars; the Bank of England can print Sterling and the European Central Bank can print Euro. No government can increase the amount of gold that exists, they can merely bring already existing gold to the market. No government can decide to follow a policy that increases the number of bitcoins beyond the potential maximum of 21 million. Bitcoin and Gold, are, therefore, limited in supply in comparison to fiat currencies. Therefore, we must ask the question ‘is bitcoin potentially the new gold? The answer to this must, however, be No!
Bitcoin is a five year old currency whereas gold has been around as a currency and a store of value for thousands of years. People know gold and trust gold; we have gold medals, golden tickets, and we even have birds in gilded cages. The value of gold behaves, within a certain set of limits, admittedly with a certain level of volatility. People trust in gold and also use gold and thus over a period of time gold is an effective store of value. Bitcoin is not yet around long enough for markets to have confidence in its behavior; it is still unknown by an estimated 76% of the World’s population, and it must be assumed that if three-quarters of people have no familiarity with it, they, therefore, see little use for it. This is one of the reasons for the large swings in the currency’s value. As more and more ordinary people begin to use it, we can expect the coin to stabilise significantly. As bitcoin stabilises the next stage will be for the mainstream investment institutions to come on board and this will not only further stabilise the value but also increase value.
The problem with mainstream investment firms is that they will require certain assurances that Bitcoin is not currently in a position to provide. If a bank, we’ll call it ACME bank, in Chicago but ten Million dollars into bitcoins, with Mt. Gox last October… who do they sue? How do they recover their client’s monies from an international company, with no secure base, apparently, that gives no guarantees? Be sure of one thing, ACME will be sued by the investors. Therein lies the problem. How do we build confidence in a currency surrounded by failed exchanges? Exchanges that set up without 1% of the checks that would be now required to establish even the smallest bank. Perhaps, we should continue to allow Bitcoin to be truly decentralised and simply store all our bitcoins in ‘Cold’ personal storage wallets? Perhaps Caveat Emptor should be our new slogan.