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Bitcoin is the new safe-haven asset

9/1/2017 384 Economic Affairs | Financial System | View Recent Current Affairs

  • Bitcoin is becoming as safe a haven as gold. The price of the cryptocurrency has been rapidly rising in recent weeks. It traded above $730 per bitcoin at the end of last week, levels not since February 2014.

About Bitcoins:

  • It is a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
  • or in other words, Bit coin is a form of digital currency, created and held electronically. No one controls it. Bit coins aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world, using software.
  • Bit coin’s most important characteristic that makes it different from conventional money, is that it is decentralized. No single institution controls the bitcoin network. This puts some people at ease, because it means that a large bank can’t control their money.
  • A software developer called Satoshi Nakamoto proposed bit coin.
  • The idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.

Analysis:

  • Cryptocurrency could be referred to as digital gold, as it shares many of the characteristics that makes the precious metal a great store of value. Bitcoin shares those same characteristics, both have an extremely limited supply and a relatively inert state. Bitcoin and gold can both be used: for example, gold is used in electronic circuits and bitcoin is used as payment.
  • While gold has had a bit of a run in 2016, over the last five year period it's been a terrible performing asset. So people starting to wonder where there are safe havens to store their assets. This might be the main reason why people are making investments in bit coins.
  • However, there are some disagreement regarding considering bitcoins as a safe-haven asset. And bitcoin is still very volatile. Bitcoin is still such a new innovation that the economics of its value aren't fully understood, and the price looks likely to remain moderately volatile in the medium term.
  • Volatility and the long-term unknowns involved in bitcoin's development stop it from being considered a safe-haven asset like gold. However, because bitcoin is unlinked to any one national currency or macroeconomic factor, it could be a good choice for portfolio diversification.
  • The recent rise in value of the digital currency is mainly due to an upcoming change which will see bitcoin miners make less money for each block that they extract. This is likely to tighten the supply of bitcoins as fewer new coins enter the system.
  • Another risk is to the security of the bitcoin's network. Part of the concern around the upcoming block award change is that if those miners make less money, then they are less incentivised to throw machinery at the network to secure it.
  • Meanwhile, gold remains a popular choice for investors looking for safety. Throughout civilisation gold has been viewed as a well-established safe haven used to store value by all cultures in all ages across the word and has never gone to zero in recorded history. As a physical asset gold cannot default or go bust and is protected by a strong property law which is simple, proven and universally understood.

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