Bitcoin’s appeal has surpassed that of gold by at least one measure reported by Bloomberg.com:
According to Google Trends, global searches for “buy bitcoin” have overtaken “buy gold” after previously exceeding searches for how to purchase silver. Last month, the amount of gold changing hands on BullionVault’s online trading platform dropped by almost a third from the 12-month average.
As this article was written on November 10, 2017, the price of an ounce of gold was $1,280.10, and the price of one Bitcoin was $6,849.05. In other words, Bitcoin’s value is nearly 5.5 times that of an ounce of gold, the world’s traditional place to store value. As that rapid rise in Bitcoin value has occurred (it surpassed the value of gold earlier this year for the first time), more and more people are reading stories like this and their curiosity is piqued. Bitcoin is “mainstreaming.” Why? People want it. That helps to explain the Google search finding reported by Bloomberg.
In 2015, University of Houston Ph.D. economist Jacob Smith released a paper, “An Analysis of Bitcoin Exchange Rates,” in which he concluded:
… the most appropriate way to think about Bitcoins is as digital gold. While nominal Bitcoin prices are extremely volatile and seemingly uncorrelated with other nominal exchange rates, relative Bitcoin prices or implied nominal exchange rates are indeed highly cointegrated with conventional market exchange rates. This mirrors the relationship between physical gold and conventional nominal exchange rates.
The big question for most people is … why? Why do so many people think something you can’t touch or hold in your hand is valuable? We hear and see many people immediately react by saying something like, “It must be a scam,” or “It must be a Ponzi scheme.” This comes from a lack of understanding of Bitcoin’s history and purpose, which is to provide a secure method of moving stored value (money) around the Internet at a very low cost.
One estimate indicates that about 14 million people around the globe own Bitcoin, and about 1.2 million own Ethereum, the number two cryptocurrency in terms of ownership and value. If this estimate is close to being accurate, and the Bitcoin Coaches think it is, that means about 0.2 percent of people on Earth own one of the two major cryptocurrencies.
An unscientific Twitter poll we reported on earlier this year shows that more than half of the people who responded purchased cryptocurrencies for the first time this year:
When did you first buy a #cryptoasset? (No need to exaggerate, this is anonymous ?)
— Chris Burniske (@cburniske) October 22, 2017
This reflects the increase in the level of awareness and curiosity that mirrored Bitcoin’s value shooting past that of gold and leaving it in its dust earlier this year. Another indicator is that Coinbase, the world’s leading cryptocurrency exchange, added 100,000 new customers in one day in early November, according to self-proclaimed Bitcoin evangelist Alistair Milne:
— Alistair Milne (@alistairmilne) November 2, 2017
More than 99 percent of people in the world do not own cryptocurrencies like Bitcoin, nor do they understand them. One of the Bitcoin Coaches’ objectives is to help people who want to start a journey into Bitcoin by providing a guide they can trust. Our combined experience in Bitcoin is 14 years, and the coin itself has only been in existence for nine years. We’ve seen a lot, both good and bad, and can provide the history and context that someone who has just jumped into the Bitcoin realm due to its skyrocketing value cannot. It’s our goal to help people make educated decisions that are in their own best interest as they venture into the often volatile Bitcoin waters.
Our breadth of knowledge and experience has led us to these beliefs regarding Bitcoin:
Bitcoin is here to stay
“Bitcoin’s design as an economic system is revolutionary and therefore would merit an economist’s attention and scrutiny even if it had not been functional. Its apparent functionality and usefulness should further encourage economists to study this marvelous structure.”
Those are the words of Columbia University Business School researchers Gur Huberman, Jacob D. Leshno and Ciamac Moallemi in their August 2017 paper, “Monopoly without a Monopolist: An Economic Analysis of the Bitcoin Payment System.” Their work was done on behalf of the Bank of Finland, which sought to better understand the evolving Bitcoin system.
“Bitcoin is not regulated. It cannot be regulated. There is no need to regulate it because as a system it is committed to the protocol as is and the transaction fees it charges the users are determined by the users independently of the miners’ efforts,” the scholastics said in their research paper.
The decentralized Bitcoin infrastructure cannot be regulated by governmental bodies. What governments can do, and have done in several cases, is to make it a crime for its citizens to invest in Bitcoin or to run a Bitcoin exchange. But since Bitcoin operates via a web of connections between innumerable computers worldwide without a central server, there is no place for governments to go to “shut it down.” So even if the Chinese government makes certain types of Bitcoin transactions illegal, you have no worries if you hold or trade Bitcoin in one of the other 194 countries in the world.
Bitcoin transcends borders, and no regulatory authority can affect its supply. This is one of the primary reasons Bitcoin has grown in value over the past five years. In countries where the governments made moves that devalued their own currencies, some investors moved their money out of the local currency and into Bitcoin, because they saw Bitcoin as a safer store of value. Venezuela and China are two examples.
Supply and demand affect Bitcoin’s value
In many ways, the value of Bitcoin fluctuates the way the values of equities and commodities do on open markets. News reports can cause a sudden rush to purchase or to sell, and corresponding increases and declines in price. This happened with Bitcoin in early September 2017, after reports that the Chinese government would be shutting down Bitcoin exchanges based in that country. Bitcoin speculators in China were selling off madly, to avoid getting stuck with Bitcoin that they couldn’t trade through an exchange in their country. And, speculators around the world were selling off, perceiving that the government action could greatly reduce Chinese participation in the Bitcoin economy moving forward.
As is always the case when Bitcoin value dips, there were articles saying, in essence, the end is near for Bitcoin. What many of those armchair critics don’t realize or understand is that the only way Bitcoin can cease to exist is for the Internet to cease to exist, because Bitcoin was designed to operate the way the Internet operates: no one central server or power source.
The Internet is designed to bypass any servers that go down for any reason. Signals are detoured to other servers that can keep access available for the Internet users. Bitcoin was designed to operate on innumerable computers around the globe linked by what is known as the “blockchain,” which operates continuously via computers that are turned on around the world. Computers in the chain that are turned off or disabled are bypassed, much like the Internet. Bitcoin transactions are processed continuously, even when some of the computers around the world running the Bitcoin program are unavailable.
There is no central bank of computers or servers where Bitcoin lives, which is by design. This is one of the ways Bitcoin’s creator made it impossible for any singular government or coalition of governments to disable it. The decentralized format also makes it nearly impossible to maliciously hack, because there is no one controlling focal point or server to target.
There will always be value
In 2014, a Bitcoin exchange named Mt. Gox, based in Japan, was hacked. Cyberthieves stole more than $460 million worth of Bitcoin that was in the online wallets of thousands of customers. The theft cast a worldwide spotlight on the insecurities of some cryptocurrency exchanges, and the anger and sorrow of Bitcoin investors who lost some or all of their holdings.
Bitcoin’s value dropped thereafter, and languished for months. But there were Bitcoin holders who saw the long-term value, and held their cryptocurrency. From a post-Gox low of $214.08 on Jan. 12, 2015, the value went as high as $7,848.31 per Bitcoin on November 8, 2017.
Reports of Chinese government intervention into Bitcoin exchanges drove Bitcoin price down in September. But it was a temporary condition which changed once there were news stories that motivated people to buy back in.
As with any asset, buy low and sell high is great advice. We continued to buy Bitcoin during the price slump, because we believe the underlying value always remains unchanged. We recommend buying Bitcoin at any time, but particularly when the price slumps. Its history has shown that the price will always recover – similar to the U.S. Dow Jones Industrial Average.
We believe Bitcoin is as sound of an investment as any equity. If you are interested in learning more about the technical aspects and history of Bitcoin, we have written a book about it which is now in its third edition. For a limited time, we are offering free instant access to our best-selling book in an effort to give as many people as possible an opportunity to understand Bitcoin. And, if you want to purchase some Bitcoin (we recommend VERY small amounts for beginners), check out our quick start guide.
Why Bitcoin will always retain value
We believe Bitcoin is the most important technical innovation in the world since the Internet. Companies in all industries are exploring ways to replicate its blockchain. The value – both tangible and intangible — that the Internet has brought to the world will be in many ways reflected in the value we will see brought to bear through Bitcoin. Its value will continue to increase because more and more people will desire it.
As its value continues to increase, so does the interest from the clients of investment firms. Already, CME Group has announced it will trade Bitcoin futures in the fourth quarter of 2017. Bitcoin is creeping into the “legacy” world of investment, and will continue to grow in value as more and more companies offer products and funds that include it. According to CME Group:
“Just as Facebook, LinkedIn and a handful of other websites or apps dominate social networking, it is possible that the incumbent currencies like Bitcoin and Ethereum could continue to dominate cryptocurrencies as well for the simple reason that they have large networks of users who accept them.”
Google’s attempt to invade the social networking space with its Facebook equivalent, Google+, didn’t turn out so well because the user community was already on Facebook’s platform (although Google, by all appearances continues to prosper in other domains). Analogous network effects could work to Bitcoin’s advantage. If a large community of users accepts it, they will be loath to move elsewhere unless a new alternative is truly competing and not a mere copycat.
Countries, collectives and cultures will eventually turn to Bitcoin as primary currency. When that happens, the demand will skyrocket. As will the value.
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