In their attempts to make sense of bitcoin, investors often compare the digital currency to precious metals like gold and silver. Does this mean the cryptocurrency’s price movements will be similar to that of gold and silver? (See also: Should You Buy Bitcoin Or Gold?)
A Similar Run up In Prices
Let’s take a look at some similarities between the precious metals and bitcoin, which is referred to as “digital gold.”
Mark Fisher of MBF Clearing recently said bitcoin was like silver during the 1970s and early 1980s because it attracted speculative investors who were enamored with its “no Wall Street” tag, and its price increased for “no rhyme or reason.” Back then, silver’s price jumped from $6 per troy ounce in 1979 to a record high of $49.45 per troy ounce in January 1980.
Gold experienced a similar price appreciation. Its price shot up from $512 in the spot market in 1979 to $850 per troy ounce in 1980. Bitcoin, of course, has outpaced gold and silver in terms of skyrocketing prices. The cryptocurrency is up by more than 1,400 percent this year. (See also: Bitcoin's Potential Is Underestimated: Thiel.)
The economic climate that led to price increases for precious metals as well as bitcoin also shared similar characteristics. Analysts typically attribute increases in silver’s price during the late 1970s to high inflation and a weak U.S. economy that prompted investors to divert funds into precious metals. Bitcoin also emerged in perilous times, in the aftermath of a debilitating 2008 recession that gave way to a low-interest rate regime.
Fundamental Differences Persist
The evident resemblances in price movement mask fundamental differences between precious metals and cryptocurrencies. Gold and silver serve as a hedge against inflation. The markets for bitcoin do not have sufficient liquidity to provide a similar buttress against inflation.
Bitcoin is also yet to prove its utility, whether as a store of a value or as a mechanism for daily transactions. This is unlike gold and silver, which have been used for centuries. Without a clearly defined utility, the digital currency might crash and burn like tulips in the 16th century. (See also: Tulipmania.)
But the likelihood of that happening was reduced this past weekend, when the CBOE began trading bitcoin futures on its exchange. Developers are also adding another layer to scale the cryptocurrency’s ability to process transactions. These developments are expected to have a stabilizing effect on its price. If history is an indicator of trends, bitcoin might undergo a price correction before that happens. Gold’s price suffered a sharp decline, from $205 an ounce to $129 per ounce, in the nine months after its futures were introduced on the CME.