Do you think Bitcoin is the new gold?
Recently, Bitcoin has swept everyone through its impressive price increase reaching above $1,000, its all-time highest price. Bitcoin has also become the safe haven of many countries, Brazil, Venezuela, to name a few.
Bitcoin, the digital asset that many skeptics still dismiss as a scam, was the best-performing currency of 2016. It began the year just above $400 and rose more than 80% to close the year near $1,000. The Brazilian real rose 25% and the Russian ruble rose 21% in the year.
Gold increased just 9%.
The digital coin continued its surge in the first few days of the new year, clearing $1,000 and then, on Wednesday, clearing its all-time peak price of $1,137, hit in November 2013. Bitcoin’s market cap reached an all-time high of $18.4 billion. Tuesday marked exactly eight years since the first bitcoin block, the “genesis block,” was mined.
On Thursday morning, bitcoin sank back down to the mid $900s, a reminder of its volatility. (As a user on the Reddit bitcoin forum wrote, “With bitcoin, you kind of have to get used to these types of situations.”)
Discounting the Thursday morning mini-crash for a moment, here are some more staggering numbers from Wednesday’s peak: The coin is up 50% in the past month, 165% in the past 12 months, and 743% since the start of 2013.
If you had bought one bitcoin just two years ago, at $280, and let it sit, you would have made almost $900 (before Thursday’s fall).
So: Why did bitcoin soar at the end of 2016, and, looking forward, can it keep flying in 2017?
When the bitcoin price rises, people like to point to a few different reasons: China (a falling yuan, leading to bitcoin buying); tightened capital controls in foreign countries; uncertainty in mainstream global markets; or, lately, bitcoin scarcity.
There’s healthy debate over which was the biggest factor in 2016. And of course, another argument is that the election of Donald Trump helped, and is continuing to help.
China, capital controls, and Trump uncertainty
The yuan fell 6% against the US dollar in the past year, hitting its lowest point since 2008. China’s foreign exchange reserves are expected to keep shrinking in 2017. It’s clear that as a result, many Chinese investors have turned to bitcoin: trading activity of bitcoin in the yuan is up more than 60% in the past 30 days, according to bitcoinity charts. More than 90% of all bitcoin activity globally, in fact, is coming from China.
Meanwhile, the People’s Bank of China cracked down with stricter capital controls in 2016, as have Venezuela (where the bolivar is plummeting) and India (where there were fears last month of a run on the banks).
The prevailing wisdom is that investors seek safe haven in bitcoin when their own governments crack down or simply when there is general uncertainty, because it is uncorrelated to the global market—its success is not tied to mainstream equities. (Bitcoin saw a rise in activity in Greece during its bank shutdown in 2015 and in Europe after the Brexit vote last year.) And bitcoin is up 40% since the US election, leading many to cite the uncertainty of the incoming Trump administration as a boon to bitcoin.
Bitcoin does thrive during times of uncertainty, but not only at those times—it can also thrive when the market is good. And while there is definite uncertainty about Trump’s policies, Wall Street isn’t acting very uncertain: US markets have flourished since the election. The Dow Jones Industrial Average is rushing toward 20,000 points. Bitcoin can fly along with it, and has.
Bitcoin mining reward halved
In July, the reward that bitcoin miners receive for recording bitcoin transactions on the bitcoin blockchain was halved for the second time in bitcoin’s history. In a nutshell: all bitcoin transactions are recorded on the bitcoin blockchain, a decentralized, permissionless, tamper-proof ledger; miners record the transactions in bundles called “blocks” and receive a small reward (in bitcoin, of course) for mining. This process also creates new bitcoins.
Miners used to earn 25 bitcoins per block mined, but since July, they only get 12.5, and that brought the annual creation of new bitcoins down from 9% to about 4%. Because there are fewer new bitcoins being created, it’s possible that speculative investment has heated up in response. On the other hand, the bitcoin price didn’t move much in the few days after the halving, so it’s hard to think supply is a major factor in the current ride.
Nick Tomaino, who spent three years in business development at leading bitcoin wallet company Coinbase and now works at venture firm Runa Capital, thinks bitcoin’s ride in 2016 is a lot simpler than all that. He points to Lindy’s Law, which suggests that the total life expectancy of a fledgling technology is lengthened for every year that it continues to survive.
Translation: the longer bitcoin is around, the more likely it is to stay, and the more investors take it seriously. “The rest is noise,” Tomaino says of the other popular explanations for the price hike. “We just had the 8-year anniversary of Bitcoin, and in my opinion it’s stronger than ever.”
Bitcoin vs Gold
Bitcoin believers like to talk about the increasing acceptance of bitcoin for payment (you can now pay in bitcoin at places like Overstock.com and Expedia) but it has been greatly exaggerated. The average person still has no real incentive to pay for something in bitcoin. Instead, as Tomaino writes in a blog post, “The primary use case for bitcoin remains the store of value/speculative asset use case.”
That sounds a lot like the traditional appeal of gold: a store of value, with some scarcity to it. Bitcoin has long been called a gold for the digital age (New York Times reporter Nathaniel Popper titled his bitcoin book “Digital Gold“), and while many people like to dismiss the idea, bitcoin is beginning to deserve the comparison. At its price peak on Wednesday, bitcoin came within $30 of the average spot price of gold.
The gold vs. bitcoin battle is going to be epic
— Barry Silbert (@barrysilbert) July 1, 2015
More and more investors (and not just those on some kind of perceived fringe) are seeing the appeal of bitcoin as a speculative investment—even if they don’t understand it or the blockchain technology that underlies it. For some, it may even be more appealing than gold, thanks to the ability to send it instantly and with very low fee.
And the longer it survives, despite volatility, occasional hacks of bitcoin exchanges, and continued hype about blockchains for banking, the more likely it is to keep rising.