The currency dubbed ‘gold 2.0’ briefly traded above the price of its long term store of value competitor
Yes, it has finally happened – gold has been dethroned as a store of value and an inflation hedge! Oh well, maybe it’s too soon to predict the doom of an age old currency such as physical gold is. While being a big headline it will take much more than a couple of months for the digital bonanza to overshadow the good old shine of Klondike.
Thanksgiving holidays were a very good reason for Bitcoin aficionados to keep on wildly speculating with the price of their precious computer code especially since most of them traded out of China. According to Mt Gox data at one point prices did hit $1242, while an ounce of gold was shaking hands with the dollar at $1241.4
Substantial volumes out of China kept underpinning the recent bull run and ended the best month in the crypto-currency’s history with quite an achievement. It is a fact – on November the 28th the value of a single Bitcoin matched the price of an ounce of gold at the time. Libertarians are divided, digital miners are waiting for their new hardware, speculators are cheering and the Chinese just keep buying.
So let’s start with Chinese appetite – apparently the huge willingness of investors out of China to just buy at any price is coming from the fact that it offers them a real alternative to buying yet another property on the inflated local housing market. A safe and sound way to transfer money offshore – what can be more tempting to a society that has been accustomed to strict capital controls?
The PBOC deputy governor Yi Gang said that outlawing the digital currency is not on the table and buying and selling by individuals is their own right, as it is a “virtual” asset. Then again which asset is not virtual nowadays – our emails, our Dropbox accounts that store our data or the very text you are reading?
While the Chinese are looking for ways to store their cash in a different way than their local bank account, Bitcoin “miners” are constantly awaiting their new hardware rigs. According to a recent article in The Economist the total amount of processing power involved in mining is surpassing 100 times the performance of the top 500 supercomputers in the world combined.
Meanwhile libertarians which are usually quite a unified and coherent thinkers are divided on the capacity of Bitcoin to store value. The Mises Institute is now accepting Bitcoins for donations, and senior fellow at the institute Mark Thorton has called it in an interview with Russia Тoday as a “very volatile medium of exchange”.
On the other side of the libertarian pole we are already familiar with the controversial views of other popular Austrian economists such as Peter Schiff who has called it “Tulip 2.0” when he heard the moniker “Gold 2.0”. Long time gold bugs in general seem to be very skeptical of digital stuff – while Schiff did predict the crash of the housing bubble he does not consider major US tech companies to be producing goods and keeps saying that the US is not producing anything because manufacturing jobs are gone.
Technological barriers are emerging and the so called “block chain” that has to be present on every computer that is able to conduct a transaction is 11 GB in size and its integrity has to be verified constantly.
A paper that we have already mentioned earlier in October by academics from the University of California has exploited a weakness that allowed them to track movement of Bitcoins in several hundred transactions. This raises eyebrows and the security questions once again.
In conclusion we remind ourselves of the infamous book by Carmen Reinhart and Ken Rogoff – This Time Is Different… Is it really different this time and how long will it take for us to know whether Gold 2.0 is real and will stay with us as a future ‘store of value’?