It’s been seven months since bitcoin prices hit a lifetime high. From there, it’s been mostly downhill with occasional spikes such as Tuesday’s nine-percent rally after one giant asset management company revealed it’s looking to invest in cryptocurrencies.
So, what have we so far learned about bitcoin and cryptocurrencies in general? Should bitcoin be classified as a safe haven or speculative investment asset like gold or is it merely a glorified digital currency that’s not very different than fiat currencies like the dollar or euro?
Instead of digging into complex Keynesian economics and dissecting how bitcoin can be used as a deflationary currency, an easier route to break this down is to examine the trajectories that bitcoin is likely to take in the future and evaluate the role it would play in our lives.
Actually, three scenarios spring to mind:
• Bitcoin fully replaces the dollar and possibly other fiat currencies as well as the main unit of exchange;
• The dollar remains the force majeure and main unit of exchange that co-exists with bitcoin except in severely distressed economies such as those in parts of the Middle East and Venezuela. This is already happening;
• Bitcoin somehow gets completely abandoned and its value crashes relative to the dollar crashes;
The middle scenario is where we are right now. In that case, bitcoin can be said to be serving the same purpose as gold. And that’s where it’s likely to be 5, 10 or 20 years down the line. And it’s not going to replace the dollar—at least not any time soon.
After all, money mainly works via trust, and governments and banks have earned it. These institutions have had a couple of centuries to condition the masses to accept currencies as legal tender. That’s a massive head start that cryptocurrencies will have a hard time erasing. Related: Europe’s EV Sales Growth Is Slowing
A 2017 LendEDU survey found that 78.5 percent of Americans had heard about bitcoin but only 40 percent were open to using it in the future.
As for bitcoin going bust (scenario #3), we have already seen that that’s not happening. Chinese mining pools remain the largest in the world despite desperate efforts by the Beijing government to completely banish crypto from the country.
But Will Bitcoin Replace Gold?
On the other part of the equation, some bitcoin protagonists see gold as an old-fashioned buggy whip safe-haven asset which will soon be replaced by shiny new bitcoins that reside in cryptographic networks. None other than the Winklevoss twins have declared that bitcoin will one day be better at being gold than gold itself.
Supposing you subscribed to Ron Paul’s school of thought that says we are currently in the throes of the largest bubble in the history of mankind that’s about to burst, you would no doubt look for safe haven asset wherein to put your money for the sake of capital preservation.
Would you sleep better knowing that maybe as much as 20-30 percent of your wealth is in gold or bitcoin?
I’m willing to wager that very few people who have been continuously invested in bitcoin over the last 12 months would even consider parking much of their wealth in cryptocurrencies during a financial meltdown. Very few people have the kind of risk appetite that can stand bitcoin’s stomach-churning volatility.
It’s funny that the Winklevoss twins qualified their choice of bitcoin as the better safe haven at a relatively quiet time in bitcoin’s evolution.
Bitcoin is likely to continue attracting significant capital inflows and possibly compete with gold, stocks and bonds for investor attention in the future. But it’s not going to replace the dollar, gold or any fiat currency just yet.
By Alex Kimani for Safehaven.com
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