Monday, 4 December 2017

Will Bitcoin Destroy the Gold Market?

Will Bitcoin Destroy the Gold Market?

In the first article, I discussed whether Bitcoin and crypto currencies might present a threat to the stability of the current financial system. Now I am moving over to discussing the gold market and other alternative investments that may be among the first to feel the effects of the cryptocurrency revolution

Both these questions came to me very strongly now that Bitcoin has reached and surpassed the quite amazing price target of $10,000 per coin.

Bitcoin is the digital peer to peer currency launched around 2009 with little or no monetary value at the time. It was even discussed back then whether it would ever have any use or monetary value. Now each unit is worth approximately $10,000, varying from day to day as it trades and there are about 17 million Bitcoin units outstanding, giving a total market value of around $170 billion to the current Bitcoin currency supply. The maximum number of Bitcoins that are available to be found or ‘mined’ was set at 21 million but that process is gradual since Bitcoins are essentially mined essentially by maintain the ledger of transactions and his takes computer power and work, as does mining precious metals for instance.

Now as Bitcoin has hit $10,000, speculation has raged as to what maximum value it might reach. Some have speculated it might go to $500,000 to $1,000,000 per coin. This is extravagant in my personal view but that is not investment advice.

A good place to look is which currently states as of 1 Dec 2017 that the total market capitalization of all 1320 of the cryptocurrencies it monitors is $332 billion, with the lion’s share in Bitcoin ($188 bn), Etherium ($45 bn), Bitcoin Cash ($24.5 bn), Ripple ($9.9bn), etc. All of the top 16 have over $1 billion and even number 50 on the list, Veritasium has a market cap of $196m!

The total crypto value is already 1/3 of a trillion! Bitcoin currently has 56% of the crypto market.

Comparing this to gold in the financial system in various forms:

Bitcoin capitalization                                               $187bn (2 Dec 2017
Cryptocurrencies total capitalization                        $332bn (2 Dec 2017
Central bank gold reserves (31,500 tonnes*)          $1.30 trillion
Investment gold (40,000 tonnes*)                           $1.64 trillion
Total investable gold (71,500 tonnes*)                    $2.94 trillion
Gold jewellery (89,200 tonnes*)                             $3.67 trillion
*Source: World Gold Council. Values calculated using 1 Dec 2017 gold price of $1279.80/oz

This table shows my hypothetical Bitcoin estimates from the previous article in comparison to the gold market:

Bitcoin market capitalization
Total cryptos market capitalization
Bitcoin’s share of cryptos
No of Bitcoins in
Price per Bitcoin
Cryptos compared to size of gold market**
1 Dec 2017
$188 billion
$332 billion
16.7148 million
8 Dec 2017
$269 billion
$427 billion
16.7281 million
$1 trillion
$2 trillion
17 million
$5 trillion
20 million
$10 trillion
$30 trillion
20 million

*I am allowing for the potential increase in the number of Bitcoins towards the maximum limit of 21 million.
** I am comparing the total crypto currency hoarding with the total value of all investment and central bank gold (likely almost the entire world supply of bars and coins).

Further increase money flows into the cryptocurrencies would likely cause significant diversion of funds out of gold.

I personally would not be surprised to see a 1 or 2 trillion dollar market capitalization for cryptocurrencies in the near future. This would reach or possibly exceed the total value of all central bank gold reserves ($1.3 trillion) and approach the total value of all investable bars and coins ($2.94 trillion). At that point, there is a danger that cryptos will be a serious competitor not only to gold but also other alternative investments in the same universe such as silver bullion, gold and silver miners (junior exploration companies and even senior producers) and even perhaps other precious metal and commodities investments, which also tend to be inversely correlated to the value of the US dollar and are used as a hedge to depreciation of the conventional currencies.

I this is already happening. Bitcoin is zooming, while gold and silver, which are other alternative forms of currency, are languishing. The libertarian political mindset is common both to precious metals freaks and Bitcoin freaks so these markets are competing for that money. Cryptos are winning, hands down. How far will it go? What will happen when Bitcoin futures open on the same platforms as gold and silver futures in December 2017?

Signs of this occurring include the World Gold Council Gold Demand Trends report from 9 November 2017, which states that overall gold demand in the 3rd quarter of 2017 had fallen 9% year on year, mostly due to less money flowing into the Gold Exchange Traded Funds (ETFs). However, bar and coin demand was up a little and central bank buying was also up.

In the more extreme scenarios, there is the possibility that cryptos could replace gold and precious metal investments as the Go To alternative investment to hedge against the conventional markets and currencies. It’s not impossible that a bubble in cryptocurrencies could cause a crash in precious metals if it continues to progress rapidly.

Right now, it’s too early to tell whether gold demand is seriously dented by cryptocurrency demand. However another sign is that the famous precious metals site now has Bitcoin and crypto quotes on its front page and as of a few days ago, there is also some technical chart analysis of cryptos being done by their analyst Jim Wyckoff. This is on a site that actually sells precious metals bars and coins! Presumably this information is being presented because of popular demand and surely shows a shift of interest from precious metals into cryptocurrencies.

Famous financial author Doug Casey said in a recent Kitco interview at the Silver & Gold Summit that Bitcoin: may be the 'Gateway Drug' To Gold and that $50,000 Bitcoin was possible, especially in the light of the war on cash. I agree in some ways but I don’t think that cryptos are necessarily a gateway to gold, unless the cryptocurrencies bubble bursts, at least for a while. There could be big swings from gold into cryptos before the see saw goes the other way. It’s very difficult to call. Frank Holmes doesn’t agree with me. He thinks that stock market offerings (IPOs) are being swamped by the number of initial coin offerings (ICOs)

Bitcoin: The 'Gateway Drug' To Gold - Doug Casey

Cryptos Are Taking Over Markets But Not Gold - Frank Holmes

Gold's Cycle Shows Metal May Retest Lows of $1,050 - Wells Fargo's 2018 Outlook with John LaForge


Poor Nerds Become Millionaires Thanks to Bitcoin. Fascinating interview with Rick Falkvinge Bitcoin Cash 'CEO' on Russia Today

© D Bellamy 2017

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Rakhi Pawar said...

Thanks for sharing your views You are providing outstanding news, very helpful to people plz keep it up Amazing blog Looking forward for more posts from You!
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goldintheuk said...

Thanks very much, Rakhi Pawar!

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