For a long time, gold has been considered a safe haven in times of crisis and uncertainty. The precious metal’s immutability and scarcity have made it an instrument of choice for institutional and retail investors during financial instability. But that could be changing, according to some bitcoin proponents.
A Price Spike Due To Chinese Investors?
Bitcoin’s price spiked last Tuesday as trading volumes at crypto exchanges multiplied. At least one theory doing the rounds is that bitcoin’s price increase was caused due to an influx of investors dumping Chinese Yuan into bitcoin markets to escape the currency’s devaluation following President Trump’s announcement of tariffs against Chinese goods. (See also: Trump's China Tariffs: What's At Stake For The U.S.?)
“It was the insider reaction to imminent, planned, significant and, perhaps, rolling Chinese currency devaluation that set off this rally,” writes Clem Chambers, Forbes contributor and CEO of private investors website ADVFN. According to him, insiders with advance knowledge of President Trump’s impending trade war circumvented Chinese capital controls by exchanging local currency into bitcoin. “Chinese insiders stuffed billions of RMB into BTC before the pace of devaluation upped its tempo on the 19th. That repricing is holding because China will devalue more as a counter-move to the trade war,” he writes. (See also: Is Bitcoin Banned In China?)
The theory is compelling and weaves a great story but it does not pass a basic data test. The Japanese Yen and US Dollar remain the most-traded fiat currencies against bitcoin. Chinese Yuan is a distant 18th and accounts for 0.05% of the total volume.
To be sure, bitcoin’s stateless appeal has an appeal similar to that of gold. But, unlike gold, bitcoin’s ecosystem is still under construction. There are no viable custody solutions to store or transfer bitcoin. Cryptocurrency exchanges are prone to hacks. Crypto insurance prices are prohibitive. The trading volume of bitcoin is also nowhere near that of gold. As a measure of comparison, the daily trading volume in gold markets is expected to be $7 trillion. Cryptocurrency markets, on the other hand, have registered $300 billion worth of daily trading, as of this writing.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin and litecoin.