Have you contemplated how the genesis and rise of crypto currencies will soon affect the way you pay for transactions to your investment and retirement portfolios? If you have not considered that question now would not be too early. There were events around the globe taking place over the last year that aggressively pushed the world’s transactions deeper into the arms of Bitcoin and its many cousins such as Ether.
Let’s take a peek at some of the earth-shaking events that occurred in 2016 and this will become a bit more clear. In this single year alone, Venezuela’s government removed half of all its paper money in circulation, deflating away its own currency. Britain became the first European Union nation, and probably not the last one, to vote in its removal from the EU. The Prime Minister of India, Narenda Modi, in incredible fashion outlawed 86% of all paper money in the country and did so in a single night.
If that were not enough, China devalued its own currency, the Yuan, and at the same time restricted the amount of money that could leave the country. All of these events occurred in one year. The net effect of these destabilization measures on currency forced investors around the world at a record pace into crypto currencies.
The response of Bitcoin and the other crypto currencies to the increased interest and heightened demand was what one might envision. Leading to Brexit in June, the prior month saw the BTC currency race higher by 76%. The next day after the referendum vote, it went up another 13% in just a single trading day. For the sake of comparison, the chart below demonstrates Bitcoin’s performance versus gold’s over the last three years:
(Chart Courtesy of Coin Desk)
When the larger bills were outlawed in India, the Bitcoin volume doubled within the country. In just 18 days on the largest Indian exchange, the Indian Bitcoin price jumped from $757 to $1,020 per BTC. This rise in the price represented a 34% increase. The result of tightening capital controls in China was a surge in the purchase of Bitcoins in the latter half of 2016. By the end the year the leading crypto currency responded to the capital controls with an upward move of 91% by the end of the year.
The story was the same in Venezuela. After the government decimated the country’s paper money supply, there was an explosion in Bitcoin trading. The volume of Bitcoin trading for the year flew 350% higher than the previous year.
Bitcoin was not the only crypto currency that had these dramatic results. Its smaller rivals throughout the world of crypto currency soared higher as well. They may not have had the same media coverage as Bitcoin, but interestingly their gains were much higher than Bitcoin percentage wise.
The events in 2016 were not isolated events. In 2017, the Euro zone had stated that it will get rid of the 500 euros notes in similar fashion to both India and Venezuela. By 2018, the second most popular of European bank bills will no longer be issued by the ECB. This loss to physical money in the EZ system will amount to about 35% of all paper purchasing power.
This development within the Euro Zone is a much greater deal than the events that took place in Venezuela and India. The European Union’s total economy is 34 times larger than Venezuela’s and 5 times larger than India’s. The concluding result is that crypto currencies will become even more popular in the mainstream, it will be more sought after and a highly valued currency over the remainder of 2017. Regarding the U.S. dollar this is a negative trend as Bitcoin and Ether vie with each other to see who will knock the dollar out of first place of being the transacting currency of choice.
Regardless of what happens to the dollar, gold will continue to survive and move forward in strength. In situations where forceful disruptions occur, as we see with the potential crypto currency takeover, gold has a remarkable track record for stabilizing the coming financial impacts.
With everything we’ve witnessed in the past and present years, which is the better investment, gold or Bitcoin?
Let’s begin the discussion by imagining that you have $100,000 of discretionary income. Next, you are required to spend all of your money on either Bitcoin or gold. Your portfolio can’t have percentages of both currencies. It’s all in with one or the other. Furthermore, the assets will then be placed in storage 50 years to which you have no access.
In which currency would you choose to invest?
Both currencies are currently in roughly the same price range. It’s important to note that to consider both as long-term currencies of value it will be necessary to put aside some of Bitcoin’s short-term instability and liquidity issues.
Some might argue that in the age technology and digitalization that Bitcoin has more use than gold. Plus, Bitcoin may seem more attractive because it’s newer and has more sparkle. But you can’t ignore the historical track record of gold. It has been the de facto preserver of wealth for centuries and spanning a variety of civilizations.
However, those who ardently back Bitcoin believe that it could one day potentially take the place of gold as that dependable investment to preserve one’s wealth over the long-term. Some believe that the qualities that make gold a respected storehouse of value are surpassed by those of Bitcoin.
Inflation vs Deflation
One key advantage that Bitcoin has over gold is that its supply level is transparent and fixed. This eliminates the fears resulting from typical inflationary pressures that are related to overproduction which could reduce the value of a currency.
A noted and well-known characteristic of Bitcoin is that its supply schedule is disinflationary. While many individuals may think that gold is similar with regard to this characteristic, some have conjectured that it can be slightly inflationary because of its supply schedule. The reason for this line of thought is that the global supply of gold has secretly increased by 1-2% annually over the last 100 years. The conclusion by these individuals is that gold is not setup to preserve value in the way that Bitcoin can. Theoretically it appears that Bitcoin’s characteristics will increase its future utility.
These same individuals also suggest that the value of Bitcoin, its usefulness and significance to the general population will continue to grow as we move forward in commerce becoming more digitized. As the infrastructure continues to build around Bitcoin, demand should rise relative to its metered supply. It is believed that this should increase its price support.
Slow and Steady Wins the Race?
This discussion is not to insinuate that gold has no legs on which to stand when compared with Bitcoin. Gold has the clear advantage when it comes to trust and reliability. Events that could drastically change the allure to Bitcoin could come in the way of a change in consumer preferences, new technological disruptions or a crackdown on the currency by governments.
Gold falls under the old adage of, “The best indicator of future results is past performance.” Gold has something that Bitcoin lacks and that is 10 centuries of being a good preserver of wealth. When considering the issues of trust and one’s willingness to store value in a particular asset, gold is by far the clear cut winner. Even when governments have sought to restrict its usage or outlaw it, gold has continued to demonstrate that it is a storehouse of value. Supporting this belief is when in 1933, President Franklin D. Roosevelt put into place measures to prohibit and criminalize the possession of gold. The value of gold survived.
Another advantage of gold over Bitcoin is that it’s not dependent on operation of the Interne. This offers gold some protection from oppressive regimes. There’s nothing standing in the way of these regimes from shutting down the Internet in their country under the guise of national security issues. The net result would be that people in those countries would not be able to utilize Bitcoin.
In comparison with Bitcoin, gold has proven itself resistant to technological disruptions. Even though Bitcoin has risen in popularity, it could still be knocked off its perch with relative ease. Furthermore, if Bitcoin is not able to attract new users and provide a decent medium regarding user experience, its popularity will take an extreme hit thus causing its value to decline.
This begs the question, will a manmade system like Bitcoin be valuable 50 years from now? This is an important question to consider when investing. Because as the alternative you have the consistency of gold, which continues to plod ahead, withstanding the test of time. Gold is not some rock you put in the garden or a piece of jewelry to be placed on your dresser, it’s an element which is a very low-risk store of value. As time has proven, gold will still be valuable 50 years from now.
Conclusion: Are Gold and Bitcoin Complementary or Substitutionary?
There appears to be little meaning in discussing whether Bitcoin will replace gold as the universal store of value, or if gold will-hold off the new competitor. Rather than discussing the possibility of Bitcoin becoming a substitution for gold, it is better to discuss how to diversify one’s investment portfolio using both assets of value. Furthermore, investors in the know will determine the allocation of each asset according to the risk profile of their respective investment portfolios. As with all investments, be diligent in your research and careful in your application.
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