The price of bitcoin has fallen 49.5% from its high of $19,782 all the way down to $9990 as of February 22nd. Since the stock market peaked in late January, Bitcoin is down 15% while gold is down only 3%.
Some unfamiliar with Bitcoin as an investment vehicle may be confused as to why I would compare Bitcoin and gold. However, the comparison makes sense when considering what exactly each of these commodities represents. Gold has long been considered the “gold standard” when it comes to discussing stores of value. A store of value is anything that maintains its value without depreciating. Gold and other precious metals have long been used in this capacity because of their relative ease of transport – even the U.S. was on still on a gold standard1 as late as 1971!
Gold makes logical sense to many as a store of value simply because we know people are willing to pay for it. Humans have always placed a large value on gold due to both its scarcity and its stability, not to mention how it looks. Those who invest in gold can logically conclude that the commodity will be valuable because people will always be interested in jewelry and in holding a valuable commodity that is not backed by a single government like currencies. These factors make gold a useful store of value and something that can be counted on as relatively stable compared to the market.
It is quite a bit more difficult to understand why Bitcoin is considered a store of value. What intrinsic properties of Bitcoin make it valuable at all? Those excited about cryptocurrencies have touted Bitcoin’s decentralized nature, relative anonymity, ease of transfer, and scarcity as sources of intrinsic value. However, all of these qualities are worthless if Bitcoin fails to establish and maintain usefulness as a medium of exchange.
Current news paints a bleak picture of Bitcoin’s future as a medium of exchange – in just the past several weeks, China has imposed a restriction on Bitcoin mining and investing, Korea banning the cryptocurrencies entirely, and JP Morgan barred credit card users from buying coins. As if this news wasn’t bad enough, Bitcoin’s recent failure to maintain any semblance of value during the stock market’s downturn has left even the most crypto-happy investors quite concerned about its future.