Bitcoin has been dropping steadily since mid-May and investors are turning to gold instead. Does this mean the end for cryptocurrencies?
Probably not, but here’s a brief synopsis on what is driving cryptocurrencies down and bolstering gold.
Yes, the sell-offs have been dramatic thanks to a cryptic tweet from Tesla CEO, Elon Musk, about not accepting cryptocurrencies for vehicles (environmental impact of mining, blah, blah). Then there’s the Chinese government’s heavy-fisted crackdown banning its financial institutions from doing business related to every kind of crypto and fears that inflation is looming over the US economy.
Financial powerhouse JPMorgan speculates that investors are dumping their cryptos in favor of good ol’ fashioned gold because they see the past couple of months of cryptos up-trending coming to an abrupt end. They may also view Bitcoin prices as “too high relative to gold and thus do the opposite of what they did in the previous two quarters, i.e. they sell Bitcoin and buy gold.”
There’s also fear that not just institutions are abandoning Bitcoin, but there will be a marked decline in retail interest and a decrease in purchases of Bitcoin by Square, a payments company that allows users to buy and sell Bitcoin, for example.
Finally, Bitcoin has shed around 40% but other cryptocurrencies have experienced even bigger losses like Ether, Cardano and Dogecoin, just to name a few.
A lot of the money leaving crypto funds has been flowing into gold. The reason being, according to the experts, is gold is a liquid asset that is already well-established with quite a few decades of proof to back it up. Cryptocurrencies are new and highly speculative.
Gold has been a go-to whenever threats of inflation loom and/or the stock market is unstable. For the past 50-ish years investors have seen gold prices rise as the stock market nose-dives and the dollar weakens during periods of high inflation.
But, (a big but), gold comes with its own set of risks. The precious metal can remain flat (or worse, decline) and be a drag on your portfolio. It does not pay any dividends or interest and if you buy physical gold (coins), the question becomes where are you going to safely store them? So, there is that to consider. That’s not to say that gold is a bad choice, but it is not going to give you super high returns immediately, like say, Bitcoin, making it less attractive to young, amateur investors willing to take big risks.
“Gold is a defensive asset that really comes into its own over the long term, when you can enjoy the return stream,” Mr. Milling-Stanley said. NY Times
Cryptocurrencies: Not Dead Yet
The recent declines in Bitcoin and other cryptocurrencies is normal and healthy according to Forbes columnist Frank Holmes. The volatility in the crypto space is to be expected from a newly emerging market.
A lot of crypto investors are young, not necessarily swayed by investing trends of the past and have a different mindset when it comes to the stock market. Many of these new young investors don’t see gold as the gold standard.
That China is against all digital currencies is completely on-brand for a communist regime. Will that remain their stance as the rest of the world, especially the United States, moves towards more widespread use of cryptocurrencies?
While prices are down now, Bitcoin is still up more than 30% over the past 12 months. Is this the time to invest?
“The strongest indicator of bitcoin’s value is the sheer size of its market capitalization — more than $600 billion. If we were to look at that through the prism of the S&P 500, it would make bitcoin a top 10 company in the world, having gone from zero to half a trillion in just 12 years. Only a few companies, like Facebook and Tesla, have grown that fast.” CNN
Bitcoin and other cryptocurrencies may be down but they are not out. The Bitcoin bust is over-exaggerated, just like the boom. One thing is for sure, its price will continue to rise and fall but as the world moves towards adopting it as a legitimate currency expect to see it become more stable if not the new gold standard.