Are Bitcoins The New Gold?


For more than four years, gold and Bitcoin prices moved in the same direction north — though Bitcoins followed a rather erratic pattern. But in the last twelve months, the two investment vehicles parted paths. Gold moved south, with SPDR Gold Shares (NYSE:GLD) losing close to 25 percent of its value. Bitcoins moved north, especially in the last three weeks, during which time they tripled in value.

Are investors fleeing gold for Bitcoins?

We cannot say. The Bitcoin market is still tiny compared to the market for gold; and correlation doesn’t necessarily imply causality. What one can say, however, is this — the major factor behind the gold and Bitcoin rallies has been a series of rounds of Quantitative Easing (QE) around the world, which has undermined the value of national currencies – and raised the specter of runway inflation.

That’s at least the conventional wisdom.

The trouble is, however, that QE isn’t the same as traditional monetary easing. It doesn’t boost aggregate demand and commodity prices, but asset prices. That’s why (commodity) inflation is nowhere in the offing, and gold prices are heading south.

But shouldn’t Bitcoins follow suit?

Not yet. The virtual currency seems to be replacing gold as protection against a decline in the value of paper currencies. Besides, there are some indications that Bitcoins are gaining acceptance as a medium of exchange — a role previously reserved for national currencies.

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