North Korean dictator Kim Jong-un is launching missiles over Japan. China is trying to write its own navigation rules in South China Sea. Washington is in disarray. Global debt continues to pile up. And central banks continue to hold interest rates at near zero levels.
Global uncertainty is rising. Yet, gold isn’t rallying.
Bitcoin, the new ‘gold,’ is.
Once, gold was the hedge against uncertainty, the asset where investors could park their cash in times of political and economic turmoil. Now Bitcoin is taking its place, as evidenced by the performance of the two assets in recent months.
The Bitcoin Investment Trust Shares have increased 10-fold in value in the last twelve months, gaining more than 80 percent in the last three months alone. Meanwhile, SPDR Gold shares are down 0.68 percent in the last twelve months and up 3.19 percent in the last three months.
Source: Finance.yahoo.com 8/30/2017
Apparently, Bitcoin is more popular than gold among investors, as a hedge against rising global uncertainties. Growing mistrust of national currencies, following dubious government policies, has pushed people into Bitcoin.
Early in 2016, for instance, the digital currency rally has coincided with India and Venezuela’s efforts to get rid of old currency notes.
Prime Minister Modi and President Maduro have very little in common -- except they have pursued policies late last year that replaced large notes in circulation with new notes (India) or with coins (Venezuela).
For different reasons, of course. Prime Minister Modi had been trying to fight corruption, a widespread problem in India. And President Maduro had been trying to fend off capital flight from the ailing Venezuelan economy.
More recently, Bitcoin rallied on growing tensions in Asia. Renewed Korean Peninsula and South China Sea tensions, for instance, pushed Bitcoin past $4,500.
Tensions in Asia boost the value of digital currency in a couple of ways.
To begin with, they raise the prospect of war, which undermines the demand for regional currencies like the yen, the yuan, and the won, and boosts demand for Bitcoin. Simply put, when the first missile flies, either intentionally or accidentally, investors would rather hold Bitcoin than any regional currency.
That could explain why Bitcoin trade in Asian currencies counts for most of the Bitcoin global trade volume.
Bitcoin trade in Japanese yen accounted for close to 46 percent of global trade volume, up from about a third a day ago; trade in Chinese yuan and South Korean won accounted for about 12 percent each; and US-dollar bitcoin trade accounted for about 25 percent.
Also, tensions in Asia fuel equity market sell-offs, boosting demand for safe haven assets like US Treasuries gold, and, yes, Bitcoin -- the new hedge against global uncertainties.
Meanwhile, there are a couple of advantages that make Bitcoin better than gold, at least for the millennial generation, which understands the digital currency better than the baby-boomer generation.
Unlike gold, Bitcoin is a convenient medium of payments around the globe, though for a limited number of transactions.
Then, there’s scarcity. Bitcoin supply is expected to be capped at 21 million. The supply of gold, on the other hand, is expected to increase anytime its price rises, as that provides an incentive for gold miners to mine for gold.
To be fair, gold has its own advantages, too. It can be used as an outright gift, to make jewelry, and in manufacturing of certain products.
But these advantages aren’t enough to bring back the luster for the yellow metal as a hedge against turbulent times. Bitcoin has already taken its place.
Still, investors shouldn’t rush to substitute the yellow metal for the digital currency in their portfolio.
Especially if they don’t quite understand cryptocurrencies.