Bitcoin: The new gold?

The listing was considered a risky (and bizarre) idea; after all, the digital currency is experimental, decentralized, and can be transferred to anyone, anywhere in the world. Until recently, it was debatable as to whether or not this currency would even gain traction.

Because it is digital, the currency does not exist in a physical sense. It also isn’t issued by any central bank, and that might be part of the appeal; without a central bank, accounts cannot be seized or frozen. (That’s an attractive point for those in Cyprus who had 10% of all savings and deposits seized by the government.)

The lack of an intervening central bank also means the currency cannot be manipulated. While the digital currency is regularly being “minted,” there is a limit to how much can be created; this is to prevent inflation. There are currently around 12 million Bitcoins in circulation. After the year 2140, no more will be minted, and the total amount available will stand at a maximum 21 million.

Still, the price of a Bitcoin can fluctuate wildly. First introduced in early 2009, the digital currency floundered, coming in at about US$14.00 earlier this year. Now, the digital currency is “worth” around $1,080. Had the above-mentioned house sold for 5,362 Bitcoins, and had the owner held onto those coins, his investment would be worth around $5.8 million today—an attractive sum.

So will Bitcoins become a universally accepted alternate currency, or is it the modern day version of the tulip mania bubble?

Former Federal Reserve Chairman Alan Greenspan says Bitcoins are a bubble, and that in order for a currency to be exchangeable, it has to be backed by “something.” This is a bit rich when you consider how readily the Federal Reserve prints off trillions of dollars of currency that is backed by nothing. (Source: Kearns, J., “Greenspan Says Bitcoin a Bubble Without Intrinsic Currency Value,” Bloomberg web site, December 4, 2013.)

Not everyone agrees with Greenspan. The Bank of America just initiated coverage on the Bitcoin and said it has a fair value of $1,300. One Wall Street analyst sees the digital currency’s value topping US$10,000 in the next two years, and Ron Paul thinks it could destroy the U.S. dollar. (Sources: Ro, S., “BOOM: A Major Wall Street Bank Just Initiated Coverage On Bitcoin And Identified A Fair Value,” Business Insider Australia, December 5, 2013; “Nick Hodge: Bitcoin Will Reach $10,000 in the Next Two Years,” Long Island Newsday web site, December 5, 2013; Pagliery, J., “Ron Paul: Bitcoin could ‘destroy the dollar,’” CNN Money web site, December 4, 2013.)

Still, Bitcoins are experiencing some growing pains. China’s central bank said last week that it is banning financial institutions from using the digital currency. The announcement sent the price of Bitcoins plunging from a high of US$1,240 to a low of $870.00 before recovering. (Source: Mullany, G., “China Restricts Banks’ Use of Bitcoin,” The New York Times web site, December 5, 2013.)

Thanks to the Great Recession and the Federal Reserve’s love of printing money, investors are looking for different ways to protect their capital should the markets tank or go through a major correction. With a single Bitcoin rivaling an ounce of gold, many investors may be wondering if the digital currency is the new gold.

Bitcoins are still in their infancy, and up until earlier this year, the currency wasn’t really on anyone’s investing radar. That doesn’t mean it isn’t a legitimate option for speculative investors; clearly, it is, as the digital currency is responsible for the making of many new millionaires this year with only more to come. At the same time, the currency’s volatility makes it less of a safe haven than gold or silver.

And if an objective investor looked at the incredible ride the digital currency has been on over the last year, it would be hard to conclude that it’s been anything but an unsustainable bubble that’s ripe for some sort of correction.

When it comes to a store of value, nothing beats gold or silver.