Bitcoin: The New Gold
Bitcoin is often compared to gold, and for good reason.
Gold and Bitcoin share many similar properties, but where gold lacks, Bitcoin seems to excel.
Wait, that's not all, there's more good news.
If Bitcoin becomes the "new gold" its price could go a lot higher.
Source: CoinSpeaker.com
Bitcoin: The New Gold
Bitcoin (COIN), (OTCQX:GBTC) is often compared to gold, some people even refer to it as "digital gold", or "gold 2.0". Although many Bitcoin skeptics deny that this comparison makes a lot of sense, Bitcoin and gold do share some striking similarities. Both are mined, have limited supplies, are widely recognized as having value, possess medium of exchange qualities, and are highly coveted assets on a worldwide scale. However, Bitcoin is much easier to transact with and, where gold lacks, Bitcoin seems to excel. For instance, I can transfer $1 million in Bitcoin to someone in another country, on the other side of the globe, with relative ease, and at a minimal transaction cost. If I wanted to conduct a similar transaction using gold it would be a more complex procedure.
In addition, Bitcoin is not just a scarce resource, it is finite, as only 21 million Bitcoins can ever be minted. Furthermore, many of its transactional properties are either on par or are far superior to gold's. Both are durable, scarce, and are widely recognizable. However, Bitcoin is easily divisible, whereas gold is not. Bitcoin is also highly transportable, and gold isn't in a practical sense. Also, gold can be diluted, and otherwise manipulated, and Bitcoin can't be.
Bitcoin Behaves More Like Gold Than, Well, Gold Even
Bitcoin is beginning to take over various gold functions. Bitcoin is already infringing on gold's store of value market share, but could it also be used as a hedge against fear, inflation, and instability?
Judging by Bitcoin's performance during the recent stock market correction, it appears that this is exactly what is beginning to occur. Lately, gold hasn't performed much like the "fear and instability hedging mechanism" it once signified. There was a time when fear and instability in stocks would herd investors towards gold in droves. Well, that dynamic appears to be largely absent in recent years. It seems that gold moves increasingly in line with stocks. Even when turmoil hits markets, gold either sells off, or stays tame, but little upside has been observed in times of increased market instability.
Gold and stocks nearly moved in lockstep over the last month, while the correction progressed. The S&P 500 declined by nearly 3% over the last month, with a low point being roughly 12% from recent highs. Instead of spiking like an appropriate instability hedge, gold traded flat to slightly lower over this time period. However, Bitcoin managed to gain nearly 25% over the last month. This is a far cry from the Bitcoin debacle many critics claimed would occur if a stock market correction materialized. In fact, it appears that at times of instability, market participants may move towards Bitcoin in search of stability.
Bitcoin is essentially decoupled from traditional financial institutions, and is therefore largely insulated from conventional financial markets, and the broader economy in general. Therefore, in times of crisis Bitcoin remains decentralized, and largely independent of other assets, which makes it less permeable to contagion. Ultimately, Bitcoin could present a logical choice for market participants to rotate capital to in times of major instability.
In addition to a fear and instability mechanism, Bitcoin may one day also be used as an inflation hedge. It has a finite amount, supply is capped, it is largely insulated from the financial system and the broader economy and makes for favorable investment vehicle to avoid inflation.
ICO Crackdown: Not Impacting Bitcoin
Another noteworthy development is the fact that Bitcoin's price has been unaffected by the SEC's crackdown on ICOs. This is significant as it suggests that Bitcoin and other established coins are not threatened by the regulatory clampdown in the industry.
After all, fewer ICOs translates into higher market shares for Bitcoin and other prominent coins. Moreover, regulation is increasingly being looked at as a positive and necessary factor essential to propelling Bitcoin further into the mainstream. Let's not forget that there are currently fewer than 23.5 million blockchain wallets in use. This accounts for fewer than 0.5%, or less than half of one percent of the 5 billion population that has access to bank accounts. This is an incredibly low participation rate that is bound to become much higher going forward.
Source: CrushTheStreet.com
Wait, There's More Good News
Other favorable elements on Bitcoin's horizon include probable regulatory breakthroughs in South Korea, which aim to legalize Bitcoin and officially classify it as a "liquid asset" in the country. South Korea is a key market for Bitcoin trading, third only to the U.S. and Japan. Once the regulatory issues are resolved, more liquidity will enter the Bitcoin market, and should create a more stable atmosphere concerning Bitcoin trading in general.
The implementation of the Lightning Network promises to solve many of the functional inconveniences associated with Bitcoin, mainly sale, speed, and cost. The system appears to be functioning as intended, and is in the opening stages of its expansionary cycle. It is likely that the LN will become widely adopted over time, which should enable Bitcoin to become an effective worldwide medium of exchange instrument.
Source: Steemit.com
Increased institutional interest is another factor likely to materialize going forward. It is estimated that roughly $10-$12B in institutional money has been invested in the cryptocurrency complex. This is an extremely low figure considering the capital poured into other major investments. If the first $10-$12B equated to a market cap of roughly $500 billion for the cryptocurrency complex, it is possible that the next $10 - $20 billion could cause that market cap to swell to $1 trillion or higher.
The combination of these encouraging factors, coupled with Bitcoin's increased utilization as a global store of value are likely to act as a catalyst in the second half of this year to support a significant rally in Bitcoin.
Technical Snapshot
Bitcoin is currently testing major resistance at the $12,000 level. If Bitcoin can punch through this level it will be a significant step in regaining its upward trajectory. Once it is firmly above $12,500 it can try at breaking through additional levels of resistance. However, a failure here could ignite some downward pressure, in which case Bitcoin is likely to decline to the $10K support level and possibly lower after that.
Source: BitcoinCharts.com
Bitcoin's Path in the Store of Value Segment
Let's forget for a moment that the Lightning Network and other add-ons will likely enable Bitcoin to become an effective worldwide medium of exchange at some point in the future. Let's forget about the numerous trillions in fiat currencies Bitcoin could plausibly compete with in the store of value segment down the line. Let's simply focus on gold, its store of value market share, and Bitcoin's potential worth based solely on these market dynamics.
The worldwide investible gold market is worth roughly $3.5 trillion. Since Bitcoin is increasingly taking on the role of "digital gold", or "gold 2.0", it is going to continue competing for market share in this segment. Also, Bitcoin closely resembles gold in many respects, but tends to outperform the yellow metal in various aspects, so it is likely that Bitcoin will continue to gain market share in this segment.
Currently Bitcoin is trading at $11,500 and has a market cap of $195 billion. This is miniscule compared to investable gold's $3.5 trillion share. In fact, it's only around 5.5% on a percentage basis. As Bitcoin's participation rate swells, so should its share of the store of value market. When Bitcoin captures half the market share gold has in the store of value segment, its market cap will be roughly $1.75 trillion, which translates to about $103,000 per Bitcoin. Also, it is plausible that at some point Bitcoin could rival, or even eclipse gold in the store of value segment, which would elevate the price to above $205,000 per Bitcoin.
But Wait, How Can Bitcoin be a "Store of Value"?
Many people have questioned Bitcoin's ability to be considered a viable store of value due to its volatile price action. This is primarily because Bitcoin is still in the relatively early stages of its existence, and at this stage of the cycle Bitcoin is still more of a creator of value than a store of it, for now. Despite its sharp fall from recent all-time highs, Bitcoin is still up by roughly 1,000% over the past year. Moreover, it is up by an unprecedented 450,000,000% or so since its first two pizza "commercial" transactions was implemented in 2010, when Bitcoin was valued at just one quarter of just one cent. Once Bitcoin's price stops ballooning and becomes more stable it will stop being a "creator of value" and can be viewed as a store of value instead, as well as a possible "more stable" form of a worldwide currency.
While the scenario I proposed may take several years to play out, various favorable developments may materialize as soon as the second half of this year. These factors could spark a significant rally in Bitcoin that may propel the digital asset's prices considerably higher into year's end. My end of year price target for Bitcoin is $35,000.
Risk: Despite my bullish view on Bitcoin, it's important to remember that it remains a very speculative asset that carries various inherent risks. Constricting government regulation, loss of popularity, security breaches, decreased sentiment, and other factors could cause demand to slow for Bitcoin, which could result in a precipitous drop in price. I remain bullish long term, but I have a relatively small place of 3-5% in my portfolio for Bitcoin due to these risks.
Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.
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Disclosure: I am/we are long BITCOIN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.