A Big Challenge to Gold from the Digital Currency Bitcoin

Bitcoin: This is the buzzword going around the financial markets around the world and is quickly spreading like wild fire.

So what exactly is this “Bitcoin”?

According to Wikipedia, Bitcoin is an open source peer-to-peer electronic money and payment network introduced in 2009 by pseudonymous developer “Satoshi Nakamoto”. Bitcoin has been called a cryptocurrency because it uses cryptography to secure transactions. Digitally signed payment messages are broadcast to and verified by a decentralized network of computers all over the world. Specialized computers use a proof-of-work system to prevent people from copying and spending the same Bitcoin multiple times, a problem for digital currencies known as double-spending. The operators of these computers, known as “miners”, are rewarded with transaction fees and newly minted Bitcoins.

Bitcoins are stored by associating them with addresses called “wallets”. Wallets can be stored on web services, on local hardware like PCs and mobile devices, or on paper print-outs.

In 2012, The Economist reasoned that Bitcoin has been popular because of “its role in dodgy online markets”, and in 2013 the FBI shut down one such service, Silk Road, which specialized in illegal drugs (whereupon the FBI took control of approximately 1.5% of all bitcoins in circulation). However, Bitcoins are increasingly used as payment for legitimate products and services, and merchants have an incentive to accept the currency because transaction fees are lower than the 2 to 3% typically imposed by credit card processors.

Notable vendors include OkCupid, Reddit, WordPress and Chinese Internet giant Baidu. Speculators have been attracted to Bitcoin, fueling volatility and price swings. As of November 2013, the use of Bitcoin in the retail and commercial marketplace is relatively small compared with a relatively large use by speculators.

Bitcoin is a controversial concept and is being blamed for money laundering across the world. But apart from the mentioned reasons, bitcoins is also posing danger to global gold trade. Let us look into this in more detail.

Bitcoin is the only digital currency which has posed a big challenged to the global gold trade. It provides us with such understanding that it is taking the shape of a serious currency.

Contrary to gold, it is in sharp shortage. However, its manipulation isn’t possible. There isn’t much cost to store of it. You can make purchase as per your needs. And you can actually buy stuff with it which you can’t with gold unless you happen to be in a Dubai souk. In many ways, it is a better alternative than gold, and its superiority is starting to become clear. And at least some money must be moving out of gold – explaining much of its weakness. After all, for a few thousand years gold has had the alternative currency market to itself. Now it is facing a new challenge. Several analysts suggest that you should park some investment towards safe and secured Bitcoins as its prices are ever increasing.

Contrary to it gold prices are declining since the start of 2013. If the financial market would crash then Bitcoin would be considered as a safe investment. Due to lack of its liquidity, its prices have witnessed $300 jump during November itself. However, due to big fluctuation in its prices, some people describe it as bubble currency. They say that Bitcoin which was $13 at the start of 2013 reached at the peak of $266 during April. In July it crashed to $70 and at the beginning of November quoted at $600. The focus of entire world was attracted towards it during last week when this virtual currency was quoted at $947 on the trading exchanges Mt.GOX. About 11 million Bitcoins are in circulation till date. Ultimately 21million Bitcoins would be in circulation through Algorithm. Thereafter its creation would stop and only this much Bitcoins would be available. Its supply is limited. There isn’t any governmental control over it. Its importance is more than the amount deposited in the bank account. Also it has store of value. All things being equal, you would expect Bitcoin price and gold prices to move in tandem. They should be driven by the same forces: a safe haven from turmoil in the markets; a hedge against inflation generated by central banks printing too much money, and a desire to diversify away from the dollar or the euro. But quite the opposite has happened. During the current year gold prices are now witnessing the bottom of $1250 after testing the intraday peak of $1700. However, some enthusiastic people are investing in it considering such price as the lowest. However, with inflation being controlled and Federal Reserve would start withdrawing its QE program, prospects for gold rally would diminish. In such situation one question would definitely arise that when gold is weakening why Bitcoin is increasing? Gold bugs can easily provide answer to this question. Gold prices were excessively high and the government as well as central banks manipulating to bring it down because gold has posed a new challenge to both, the paper money and the government authority.