by Tony Davis – Atlanta Gold & Coin Buyers ……….
It was slightly over six months ago that Market Watch featured an article questioning whether or not Bitcoin would become the preferred alternative currency to gold. While the article was thought provoking, we were of the opinion (and still are) that Bitcoin would not replace gold as the preferred alternative currency, as it doesn’t meet the definition of sound money. We stated our case in a previous article written for Coin Week, which can be found here. While Bitcoin’s momentum increased from the time the article was posted until it hit its peak of $1,147.25 per share on 12/4/13, it has recently experienced a precipitous decline and is $608 per share of this writing, according to www.coindesk.com, which may not be the most alarming news.
Bitcoin made headline news this week, not so much because the price has fallen $540 per share in a matter of two and a half months, which is significant news in itself, but because Mt. Gox, the largest Bitcoin exchange in the world, experienced a software flaw that prohibited the withdraw of shares. This caused the price of Bitcoin on the exchange to tumble as low as $229 per share, which was more than half the trading price of Bitcoin on some other popular exchanges. This announcement comes on the heels of a suspension of withdraws from Bitstamp, another Bitcoin exchange, which halted withdraws due to a bug. In other recent news, hackers stole an estimated $2.7 million of Bitcoin from Silk Road 2, which is Silk Road’s second attempt to establish an online site of banned products, the first of which was recently shut down by authorities.
The volatility and issues that we described above highlight some of the inherent flaws with Bitcoin. While individuals are placing a higher priority on privacy, we don’t believe that Bitcoin is a safe or stable form of protection. Rather, it should be viewed as speculative investment that has the potential for high returns, but also for substantial losses. The fact of the matter is that many individuals that are invested in Bitcoin would be hard pressed to explain the investment to you. As Warren Buffet has famously said over the years, you should never invest in a business, or in this case, a currency that you don’t understand. Not only do few individuals seem to understand Bitcoin, but besides the stomach churning volatility, there’s political risk, such as the risk that Bitcoin could be banned, as we recently saw in China, or the risk of theft, as we’ve highlighted above. While privacy is one of the greatest benefits of using Bitcoin, it can also be one of the greatest shortfalls.
While some will argue that gold and silver are also volatile investments, and that they can also be viewed as speculative, in this writer’s opinion, an investment in gold or silver far exceeds the benefits of owning Bitcoin shares as an alternative currency. For one, there is a large and liquid market available for gold and silver. Converting gold or silver into dollars, or any other currency for that matter, is as simple as visiting your local coin dealer. Secondly, gold and silver provide a hedge against inflation and financial crises, so they can be viewed as an investment and insurance, as we’ve previously discussed. Thirdly, the price of gold and silver typically moves inversely to the dollar, so if the central bank is inflating the monetary supply, thereby, devaluing the currency, an investment in gold and silver can help to maintain one’s purchasing power. Lastly, gold and silver are one of the only investments that at the same time aren’t another individual’s liability, so there is no counterparty risk when investing in physical metals.
In summary, while Bitcoin offers some advantages to individuals, such as anonymity and an alternative to their nation’s currency, it also carries with it some disadvantages, such as high volatility, political risk and the risk of theft. Just because Bitcoin is currently experiencing issues doesn’t mean that it can’t be considered a viable speculative investment in the future, but we highly recommend that you don’t view it as an alternative currency. Rather, stick with gold and silver, which have been viewed as money for thousands of years and will still be around when all current fiat currencies are long gone.
Tony Davis is the owner of Atlanta Gold & Coin Buyers, a full service Atlanta based coin and bullion dealer specializing in buying, selling and appraising coins and coin collections of all types and sizes. Visit his website atwww.atlantagoldandcoin.com for additional information on the products, services and educational resources offered by his company. Tony can be reached at[email protected] or at 404-236-9744. Be sure to “like” us on Facebook and follow us on Twitter to receive a feed to our blog to stay on top of all of the latest economic and political factors affecting the precious metals market.