To the casual observer gold and Bitcoin appear to be two peas in a pod. Both are considered “alternatives” to the dollar and with all of the massive debt and QE (quantitative easing) programs, they have been consistently in the news touted as such. Both also seem to attract the same crowd who believe that the dollar is doomed to either mediocrity or outright failure. Yet gold is nearing multi-year lows as Bitcoin has been going to the moon. (As this is written Bitcoin is around $600 while gold is nearing $1,200.) Not only that but Bitcoin seems to go higher even as they make the news in a negative fashion. Regulators are turning their gaze toward the virtual currency and the infamous Silk Road company (used to sell drugs using the anonymous currency — allegedly, of course) has been raided, not to mention millions of dollars disappearing from a Chinese exchange. So, what in the world is going on here? There are a number of explanations, but on the surface it may simply be that it is just plain hot right now:
Bitcoin is acting a bit cr-oizy. Well, more than a bit crazy, that bitcoin has swung from $350 to $900 in the past ten days.
Volatility, anybody? There’s no major exchange like a normal currency and/or a stock or bond would trade on for $BITCOIN (yet), so it’s going to be wildly volatile for a long time, I would expect, even if it does end up becoming a de facto alternative currency.
That’s about as good an explanation as any. There is no there there after all. Now, before you Bitcoin fans go crazy, you know that it is true, in a traditional sense. There is no physical Bitcoin (and no, someone making something that looks like a coin in their garage does not count) and yes, that is the point, but it is still true. An argument can be made (and has been…endlessly) that there is nothing to any fiat currency including the dollar. But semantics are used in this argument, by both sides. Whatever your feeling on the dollar, one can still physically store dollars, but more importantly the U.S. government, by force of law, recognizes their currency. That may be a little thing to the Bitcoin revolutionaries, but it is a powerful differentiation. But, let’s put that aside for now. Why is gold going down while Bitcoin is going to the moon (and back and forth)? For one, Bitcoin is just more super duper extra cool. That may seem to be an idiotic reason, but it is definitely a factor. Gold is for squares to use a 1950’s term and that is the time period where most Bitcoin traders feel gold belongs. Just a casual glance at any Bitcoin forum, chat board, twitter feed, etc., will quickly tell you that these virtual currency guys think that they are the cool kids. And look, with Bitcoin going from, well, zero to $600 plus, it’s not hard to see why they might be feeling pretty high on themselves.
But it is hard to separate gold from Bitcoin in the long run. Yes, Bitcoin can go much higher as acceptance expands and people in countries with deteriorating money look for safe havens. But let’s face it. If the dollar (and other currencies) were perceived to be strong, virtual money would have much less appeal, at least until it became easier to buy, sell, store and use. Maybe Bitcoin is just finding its equilibrium (in spectacular fashion!) or maybe it’s a gigantic bubble, but either way sooner or later the value will be determined by the strength of more traditional money. If the dollar implodes, Bitcoin will soar (vs. the dollar, of course) and if it strengthens, then Bitcoin will stabilize at some undetermined level and be rather boring. And yes, the same can be said of gold.