Bitcoin and Gold
It’s been a bad week for Bitcoin.
The price of the cryptocurrency continued its free-fall after one of the largest exchanges in China announced it was shutting down.
This follows on the heels of an article published by Caixin announcing the Chinese government plans to ban cryptocurrency trading on all domestic exchanges. Information coming out today seems to confirm the story reported by the Chinese publication. Cointelegraph reported, “information slowly appearing from China appears to confirm that trading will no longer be legal for Bitcoin-to-fiat platforms.”
BTC China, one of the country’s largest crypto exchanges, said in a tweet Thursday it plans to shutter operations by Sept. 30 as Chinese authorities crack down on cryptocurrencies.
Bitcoin responded, falling nearly 21% in a 24-hour period.
But despite the rocky week, some analysts say this doesn’t necessarily spell doom and gloom for Bitcoin, or cryptocurrencies in general. According to Cointelegraph, some in the cryptocurrency world say the moves by China will actually prove beneficial in the long-run.
Speaking in emailed comments, several industry players said that while markets were reacting harshly to Chinese regulatory moves, the long-term benefits for Bitcoin’s ethos and therefore stability were clear.”
Just before China announced its Bitcoin crackdown, emerging markets fund manager Mark Mobius warned that governments will begin clamping down on digital currencies because of their use in illicit financing, terrorism, and drug trafficking. But despite their best efforts, government regulators will find it difficult to stop cryptocurrencies. Their decentralized nature makes it virtually impossible to shut them down without turning off the internet. China can force the closure of domestic exchanges, but that won’t stop people from trading cryptocurrencies. One crypto analyst told Cointelegraph the moves by the Chinese government will likely speed the development of more non-custodial and decentralized models.
Regulation is neither necessary nor possible for decentralized models, and the future may have gotten just a bit brighter by nudging the crypto community to develop high speed, non-custodial exchanges.”
Bitcoin and Gold
Former PIMCO head and chief economic adviser for Allianz Mohamed El-Erian, talked about Bitcoin and gold during CME Group’s annual precious metals dinner in New York. Earlier in the week, he made waves when he said Bitcoin should be valued at about half of what it is today during an interview on CNBC’s Squawk Box.
The current pricing assume massive adoption, and I don’t think governments will allow the amount of adoption that’s currently priced in.”
But during the dinner, El-Erian emphasized that cryptocurrencies aren’t going anywhere, and he said it’s undeniable that they are impacting the gold market. He noted that gold has had a good year – up about 15%, “but not really as good as you should have had given the geopolitics.”
He went on to emphasize that cryptocurrency won’t replace gold, but investors can’t just write them out of the equation.
It’s not a substitute to gold but don’t underestimate when a small loyal customer base falls in love with another asset class. When there is something that is new, pay attention to it to understand it. Pay attention to what cryptocurrencies are doing to your ecosystem … When cryptocurrencies hit a pothole, part of the reaction will be to go back to gold. But until that happens, gold will be affected.”
One thing for certain: one of the defining characteristics of cryptocurrencies is volatility. Nobody really knows what the future holds. Moneyweb offered some poignant analysis on the cryptocurrency phenomenon.
Crypto is such a new, complicated phenomenon that any speculation about transaction costs, booms and busts, bubbles and bursts, usage, security, ultimate winners and losers, regulatory framework, taxation and indeed the real value of the crypto itself is premature, albeit valuable to its development. With its widely trusted blockchain technology, bitcoin may well morph into something different, or even be replaced. But it will be difficult to replace the decentralized nature of bitcoin. Control of money through central banks, banks and governments is simply no longer trusted. Likewise, central control of a crypto currency will suffer the same fate. Despite extreme volatility, bitcoin’s price has clearly shown explosive demand. Until one can clearly determine where that demand is coming from, how long it will be sustained and at what price, can one start predicting and charting its course. The same goes for the plethora of other cryptos, some good and some absolutely rotten, that enter this space and dilute the offering.”
Many analysts believe investors are moving into cryptocurrencies and gold for the same reasons. They see both as an alternative to the central-bank controlled fiat system, and they view both assets as a safe-haven. The primary difference between precious metals and cryptos lies in their respective volatility. The future of Bitcoin and other cryptos remains uncertain. On the other hand, people have considered gold a safe store of value for centuries.
Some investors have made a lot of money in the world of Bitcoin and other cryptocurrencies. But it remains a risky world. Diversifying your cryptocurrency portfolio with precious metals can help mitigate some of the potential downsides and put you in an overall stronger financial position.
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