With the current outlook on Bitcoin, is gold still a safe haven?
Here, we provide a preview of HedgeSPA’s newsletter – HedgeSPA Market Scenarios April 2014.
Is Bitcoin The New Store Of Value?
The rise of Bitcoin has brought about the dream of an autonomous digital economy, where proof and transfer of ownership can be made without any need of a trusted third party.
In the discussion that entails, the HedgeSPA team believes that Bitcoin is probably not going to take over as a new store of value due to an artificial ceiling on its “money supply”. Nevertheless, there is plenty of potential for another crypto-currency to revolutionize the global payment systems eventually.
Is Bitcoin The New Currency?
With the rise of Bitcoins, many question if Bitcoin may become the new gold standard. The HedgeSPA team is not convinced that the current flow of Bitcoins will make a massive impact on financial markets, but any of the major events below will change overall market expectations. Moreover, current Bitcoin prices are too volatile to fit stable models. In the following, we envision the list of scenarios related to Bitcoin.
Scenario 1: OPTIMISTIC – Bitcoin becomes a viable alternative currency
Users realize that using Bitcoin is much more convenient than using cash or credit cards, as their use do not require any sensitive personal information. With the potential adoption of Bitcoin on social media channels, there is a voracious demand for new Bitcoins, causing Bitcoin prices to rise. To cope with the demand of Bitcoins in transactions and stay competitive, more merchants will accept Bitcoins.
Recognizing the vulnerability of the Bitcoin network lies with the exchanges, government impose more stringent regulations of Bitcoin exchanges. Stringent regulations, coupled with learning from the mistakes of Mt. Gox, Bitcoin exchanges are becoming more robust.
Lastly, with the greater stability of Bitcoin’s value, lower transportation costs and ease of storage, investors might begin to invest in Bitcoins instead of gold. Bitcoin eventually becomes an important currency like USD or EUR.
Scenario 2: TOO OPTIMISTIC – Bitcoin or a successor revolutionize currency
In addition to what has been stated in scenario 1, Bitcoin dominates all digital currencies. With the greater stability of Bitcoin’s value, investors begin to invest in Bitcoins, instead of gold. The lower transportation costs and ease of storage enable Bitcoin to replace Gold and cash to become the universal store of value.
Scenario 3: PESSIMISTIC – Bitcoin prices soar and the bubble burst
There is a strong demand for Bitcoin as people see Bitcoin as a way to circumvent regulations on currencies. Bitcoin prices rise to meet its demand.
The volatility of Bitcoin prices rise so much that its function as a store of value is questioned. Volatility coupled with exchange rate risk will cause retailers to start converting any Bitcoin payment immediately back to currency, and investors to begin converting their Bitcoin back to cash.
Central Banks also begin to resist Bitcoin in an attempt to block criminal activities and to maintain exclusive capital controls. Heavy regulations imposed by governments result in soaring transaction costs involved in dealing with Bitcoin. As a result, Bitcoin prices begin to fall.
Eventually, the uncertainty of Bitcoin’s future, coupled with the lack of confidence in Bitcoin as a storage of value, triggers a sell-off in panic. The burst of the Bitcoin bubble causes Bitcoin prices to tumble and then flight to quality. In response, gold prices soar.
Scenario 4: STAGNATION – Bitcoin prices fluctuate and settle to a steady level. Payment systems gradually revolutionized.
Short term Bitcoin prices fluctuate due to two opposing forces: confidence in Bitcoin’s value versus potential regulations. Bitcoin prices eventually fall and reach steady level. With the lower volatility of Bitcoin and the potential of Bitcoin to reduce transaction costs, some investors begin to regain the confidence to transact in Bitcoin again.
More businesses began to accept Bitcoin, so it becomes an accepted form of payment among many alternatives. To stay competitive, traditional merchant payment providers slash their profit margins by offering lower fees. Eventually, Bitcoin co-exists with other form of payment methods.
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HedgeSPA Research Team – April 2014