Is Bitcoin akin to 'digital gold'?
- In October, PayPal announced that it would begin allowing users to buy, sell, and hold cryptocurrencies.
- Other major fintech companies—Square, Fidelity, SoFi—have also recently begun investing heavily in cryptocurrencies.
- While prices are volatile, many investors believe cryptocurrencies are a relatively safe bet because blockchain technology will prove itself over the long term.
Presentation slide from Sanja Kon's presentation on the evolution of money at 2020 Web Summit
Credit: Sanja Kon<p>The move came shortly after the payments company Square invested $50 million into Bitcoin, and after Fidelity announced that it was opening a Bitcoin fund into which qualified purchasers could invest <a href="https://www.bloomberg.com/news/articles/2020-08-26/fidelity-launches-inaugural-bitcoin-fund-for-wealthy-investors" target="_blank">(minimum investment: $100,000)</a>. Together, this institutional backing might have something to do with Bitcoin's recent surge back to near its 2017 price peak of $19,783. (Bitcoin is listed at 19,384.30 as of Dec. 3.)<br></p>
Presentation slide from Sanja Kon's presentation on the evolution of money at 2020 Web Summit
Credit: Sanja Kon<p>But more importantly, it suggests cryptocurrencies might soon have the opportunity to prove themselves in real-world use cases. After all, skeptics have long doubted the ability of cryptocurrencies to go mainstream as a form of everyday payment. But people seem increasingly comfortable with digital payment systems.</p><p style="margin-left: 20px;">"The entire world is going to come into digital first," Schulman said at Web Summit, adding that PayPal's services already go hand-in-hand with cryptocurrencies. "As we thought about it, digital wallets are a natural complement to digital currencies. We've got over 360 million digital wallets and we need to embrace cryptocurrencies."</p><p>Sanja Kon, CEO of global partnerships at the cryptocurrency payments processor company UTRUST, also spoke at Web Summit about the increasing adoption of digital payments:</p><p style="margin-left: 20px;">"Physical cash is becoming more and more obsolete. And the next step in the evolution is digital currency."</p><p>Kon noted some of the inherent advantages of cryptocurrencies, namely ownership. </p><p style="margin-left: 20px;">"For many people, this is really the main benefit of cryptocurrency: Users owning cryptocurrencies are able to control how they spend their money without dealing with any intermediary authority like a bank or a government, for example," Kon said, adding that there are no bank fees associated with cryptocurrencies, and that international transaction fees are significantly lower than wire transfers of fiat currency.</p><p>Kon said cryptocurrencies have unique growth opportunities in areas where people aren't integrated into modern banking systems:</p><p style="margin-left: 20px;">"With cryptocurrencies and blockchain, with the use of just a smartphone and access to internet, Bitcoin and cryptocurrencies can be available to populations of people and users without access to the traditional banking system."</p>
Bitcoin as 'digital gold'<p>Still, it could take years for people to start using cryptocurrencies for everyday purchases on a large scale. Despite this, many cryptocurrency advocates see digital currencies, particularly Bitcoin, as a way to store value—digital gold, essentially.</p><p style="margin-left: 20px;">"I don't think Bitcoin is going to be used as a transactional currency anytime in the next five years," billionaire investor Mike Novogratz recently told <a href="https://www.bloomberg.com/news/articles/2020-10-23/novogratz-says-bitcoin-is-digital-gold-not-a-currency-for-now?srnd=markets-vp" target="_blank">Bloomberg</a>. "Bitcoin is being used as a store of value. [...] "Bitcoin as a gold, as digital gold, is just going to keep going higher. More and more people are going to want it as some portion of their portfolio."</p><p>There are obvious parallels between gold and Bitcoin: Both are mined, do not degrade over time, are finite in supply, and aren't directly tied to the value of fiat currency, making them <a href="https://www.reuters.com/article/us-gold-inflation/gold-as-an-inflation-hedge-well-sort-of-idUSKCN1GD516" target="_blank" rel="noopener noreferrer">relatively invulnerable to inflation</a>. The obvious objection is that the price of Bitcoin, and cryptocurrencies in general, is far more volatile than gold.</p><p>But for investors who believe the inherent value of cryptocurrency technology will prove itself over the long term, these price fluctuations are just bumps on the long road to the future of currency. </p><p style="margin-left: 20px;">"It's no longer a debate if crypto is a thing, if Bitcoin is an asset, if the blockchain is going to be part of the financial infrastructure," Novogratz said. "It's not if, it's when, and so every single company has to have a plan now."</p>
Unfortunately, it's getting easier to predict what might happen to cryptocurrencies when the economy takes a nosedive.
- Born in the wake of the 2008 financial crisis, Bitcoin hasn't yet faced a downturn like we're starting to experience.
- Based on the developments of recent weeks, some crypto market trends are starting to emerge.
- Bitcoin's relationship to gold is strong, futures and options are losing their lure, and stablecoins are on the rise.
1. Bitcoin shows a higher correlation to gold<p>The idea of Bitcoin as "digital gold" has been around for a while. It's true that <a href="https://bigthink.com/new-study-on-cryptomining-energy" target="_self">the two assets share some similarities</a>: a price driven by the forces of supply and demand and limitations on supply, for example. However, whether or not investors would treat Bitcoin as a "safe haven" investment during times of turmoil in the stock market hadn't been proven.</p><p>On March 12, as the global stock markets plummeted and <a href="https://www.cnbc.com/2020/03/12/stock-futures-hit-a-limit-down-trading-halt-for-a-second-time-this-week-heres-what-that-means.html" target="_blank">circuit breakers halted</a> trading on the NYSE, the price of cryptocurrencies also took a nosedive. Bitcoin <a href="https://coinmarketcap.com/currencies/bitcoin/" target="_blank">lost</a> more than 40% of its value – the biggest single-day percentage drop in price since 2013.</p><p>However, on that day, gold held its price. Critics were quick to point out that the "digital gold" theory had been debunked, but perhaps they were a little too quick. Over the days that followed, gold recorded its sharpest drop in a single week, losing <a href="https://www.jmbullion.com/charts/gold-price/" target="_blank">around 12%</a> of its price.</p>
2. Open interest in futures and options takes a hit<img type="lazy-image" data-runner-src="https://assets.rebelmouse.io/eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJpbWFnZSI6Imh0dHBzOi8vYXNzZXRzLnJibC5tcy8yMjkxNDEzNS9vcmlnaW4ucG5nIiwiZXhwaXJlc19hdCI6MTY1OTg1MDk3MH0.9NFPnEbQ0H3yk5F-VG16I_OKRc1y-2wPNeyQmqbJHGI/img.png?width=980" id="6a104" class="rm-shortcode" data-rm-shortcode-id="7c7356f86e2f3d8c0d604913bf6a221a" data-rm-shortcode-name="rebelmouse-image" data-width="1200" data-height="670" /><p>March 12 was a pivotal moment on the cryptocurrency markets across derivatives, too. Before the coronavirus started to take hold, Bitcoin futures had been enjoying something of a moment. According to Skew, total open interest had more than doubled from around $2.2 billion in November 2019, to $5 billion in mid-February.</p><p>On March 12 and 13, as the price of Bitcoin dropped precipitously, crypto exchanges liquidated millions of dollars' worth of long positions.</p><p>Market leader BitMEX came under particular fire, as it had <a href="https://cointelegraph.com/news/bitmex-takes-a-hit-community-cries-foul-play-following-market-crash" target="_blank">experienced two 25-minute outages</a> meaning traders had no access to their accounts to top up margin or take any actions to hedge their positions. Traders on BitMEX saw over $1.5 billion of positions liquidated in the space of two days.</p>
3. Demand for stablecoins skyrockets<p>Stablecoins were another asset class that was burgeoning before panic surrounding COVID-19 took hold. Because they're pegged to fiat currencies such as the USD, stablecoins had become the go-to currencies for traders entering and exiting positions. In 2019, the most popular stablecoin, Tether (USDT), had <a href="https://coinmarketcap.com/currencies/tether/" target="_blank">doubled its market cap</a> from $2 billion to $4 billion, and <a href="https://www.bloomberg.com/news/articles/2019-10-01/tether-not-bitcoin-likely-the-world-s-most-used-cryptocurrency" target="_blank">overtaken Bitcoin</a> as the most traded cryptocurrency.</p><p>During the market turmoil in March, while the rest of the market tanked, Tether came out smelling of roses. The market cap of USDT gained a further $1.5 billion in the second half of March alone, as Tether Limited attempted to mint enough stablecoins to meet the demand of investors keen to convert their gains or losses to a more predictable asset.</p>
Why invest real money in digital coin? Because the payoff a decade from now could be enormous.
When it comes to Bitcoin it's all about the long game, says Abra founder and CEO Bill Barhydt. Bitcoin is flexible because you can break it up into smaller divisions, called Satoshis. In 10 to 15 years, those Satoshis alone could be $1000 a piece. It might take a while for Bitcoin to really start trading at the level of gold and silver, says Bill. Interestingly enough, says Bill, by and large, people who have Bitcoin are holding on to it, just like those precious metals. Once more of it is mined, we'll start to see the market become less volatile.
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Bitcoin is a cryptocurrency located completely online and not tied to any central bank. Its origins are shrouded in mystery and very few people predicted the popularity it currently enjoys.
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No matter what you believe the future holds for Bitcoin or the cryptocurrency market at large, rest assured, you’ll have no trouble finding people who agree with you.