Bitcoin: The New Gold on Steroids

bitcoin

Those who invested in and held onto gold and silver prior to 2003 are still reaping the benefits, even if they missed out on the peaks in 2011. Gold closed at $1250.60 on November 29, nearly four times the price from 10 years ago. The $19.98 closing price for silver that same day is also about four times its price a decade ago. The primary focus of precious metals skeptics is the fact gold has lost more than 27 percent of its value since the beginning of this year. The current bear market with gold stands in stark contrast to the virtual bull market for Bitcoin.

The price of Bitcoin peaked at $1,242 over the Thanksgiving holiday, an astounding feat considering the decentralized crypto-currency traded at a mere $13 in January. But if you’re not satisfied with the price, wait a minute (literally). Bitcoin’s volatility, along with a lack of understanding and reliable exchanges are what’s keeping it from becoming mainstream. But like Generation X did in the early 2000s with gold as a long-term investment and inflation hedge, Gen-Y and their technical savvy can pave the way for Bitcoin.

Bernanke Speaks

It’s no secret that when Federal Reserve Chairman Ben Bernanke speaks, the markets react. The mere mention of the Fed potentially tapering off or speeding up QE3 (buying $85 billion per month in mortgage-back securities and U.S. Treasurys) causes tidal waves on Wall Street. Bernanke addressed a letter to the U.S. Senate on September 6 that acknowledged Bitcoin “may hold long-term promise” despite the Fed’s inability to directly manipulate its value. The letter was made public on November 19. Since that day, Bitcoin went from trading at about $300, to the current $1,200-plus, according to Blockchain.info. Chinese investors, particularly Baidu — that country’s largest Internet search engine — have also fueled the Bitcoin surge.

Liquidity

Gold and silver bullion investors have the advantage of being able to hold and see a shiny metal in their hands. But they must seek buyers when they want to sell. Most other investments work the same way. Annuities can only be liquidated by inquiring with companies like J.G. Wentworth to purchase all future payments. But it’s becoming simpler by the day to exchange Bitcoins for currency. Coinbase, an international Bitcoin wallet, now allows users to connect their wallets to any U.S. bank account. You can sell Bitcoins and instantly have cash deposited in your account. You can also simply spend your Bitcoins at the growing number of merchants who accept them.

Is It Too Late To Get In?

Its difficult to predict a floor for Bitcoin in the coming months. What makes Bitcoin easier to predict than fiat currencies, however, is that its finite. There are currently about 12 million Bitcoins in circulation, according to BitcoinCharts.com, with 21 million being the maximum number that can possibly exist. Thus, it is not susceptible to inflation, deflation or any other manipulation by central banks. Bernanke’s de-facto acknowledgement of Bitcoin’s legitimacy and China’s investing binge will likely keep Bitcoin’s floor above $500, barring another Silk Road-type issue or mass hacks into major wallet providers. The Chinese government has barred banks from accepting Bitcoin, a policy which will also slow the digital currency’s recent surge.

Gold advocates are adamant about buying now, as the current price is the lowest since early 2011. Meanwhile, the $1,200 mark for Bitcoin could be viewed as a bargain this time next year.

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