|Daniel Tortis, Director of Digital Media|
Last week bitcoin reached all time highs, leading to investors realizing huge paper profits. Some people are even asking themselves if they should move some of their traditional investments in commodities such as gold into the cryptocurrencies for the long haul.
Bitcoin is a currency that allows people to transfer money over the internet. There is a finite amount in existence and offers an alternative to the fiat money that is being printed by central banks around the globe such as the U.S dollar or the Euro. Bitcoins are held in virtual wallets which make them relatively secure and are currently used as an investment instrument as they are not regulated or currently accepted as legal tender. However, why does Bitcoin have any value?
A bitcoin’s value is dependent on its value as a medium of exchange. For something to be considered a store of value it has to have some intrinsic value which means value that item has in its own right. If bitcoin in the future is not a successful medium of exchange it will have no utility to people and therefore no value. Bitcoin’s value therefore is tied to people around the world believing that you can buy things with bitcoin in the future.
Some people swear that bitcoin will continue to rise over time. On the flip side, some individuals believe bitcoin is a ponzi scheme with people holding massive amounts of bitcoin benefiting from others who get in later in the game. Bitcoin may be a step toward a new monetary exchange; however, there are few companies that accept it as a viable form of currency. There are also competing crypto currencies who may in the future have better blockchain technology rendering bitcoin useless.
There is a reason gold has been used as a store of value and why the U.S dollar used to be tied to it. Gold has been held as a store of value for over 5000 years in Ancient Egypt due to the fact that the metal is rare and humans cannot produce gold in a lab cost effectively. Gold also doesn’t corrode, providing a sustainable store of value. Humans also have had a social connection to gold and it has had prevalence in many cultures, including its use in wedding rings. Gold also has immense value as a commodity, with it being used in smart phones and satellites, among other things.
Today, the demand for the commodity, the amount of gold held by governments, the value of the U.S. dollar, and the desire to hold gold as a hedge against inflation and currency devaluation are all contributing to increases in the price of gold. Bitcoin also rises in value through similar occurrences such as a hedge against inflation and uncertainty amongst the world forum and national governments.
Investing is always a trade between risks and rewards. So if one is looking for large capital appreciation, bitcoin may be the solution, but you also risk losing all your money should bitcoin no longer have any value in the future. Gold, however, is here to stay as an investment vehicle for years to come barring an asteroid full of gold hitting earth.