Gold-Backed Bitcoin to Become New Global Monetary System?
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Amid declining public and market participant trust in central bank monetary policies and governmental meddling with the economy, the Bitcoin gold system could replace the agonizing remains of Bretton Woods.
Kristian Rouz – The ongoing rally in stocks, coupled with subdued market volatility, suppressed international gold prices this week. This, combined with the resurgence of the dollar, has produced bearish near-term expectations for gold among participants of conventional financial markets.
Gold prices eased 3 percent this week to $1,248.40/oz. – way below the psychological threshold of $1,300/oz.
This is a result of the dollar rally, supported by brighter GDP growth expectations in the US, President Trump’s tax reform and a declining demand for safe havens amid investors.
However, gold – the ultimate safe-haven asset – is already being priced in Bitcoin. The largest cryptocurrency has posted a stunning rise in value this year, from around $1,000 per coin to above $15,000. Now, Bitcoin’s accession to conventional financial markets might require some solid asset backing, as wild swings in Bitcoin’s value still fend off some investors.
Here’s when the gold-against-Bitcoin trade steps in.
In many ways, gold and Bitcoin are similar types of assets. Bitcoin’s value draws its main support from its limited supply, as it requires an enormous computer processing capacity to create new coins. The global supply of gold is rather tight as well, as gold mining is very labor and investment intensive.
“The marriage of cryptocurrencies and gold enables alternative choices to holding more than fiat currency,” analysts of the Hutch Report wrote.
“Although we can’t imagine fiat currencies to be replaced overnight, the promises of gold backed cryptos do look compelling moving into the future and they are certainly important to follow.”
Both Bitcoin and gold are currently traded against the dollar, and Bitcoin —gold pricing is not quite as ubiquitous yet. However, the Bitcoin —dollar pair could eventually become the universal currency and payment system, rendering the institution of central banking obsolete.
The price of Bitcoin gold tumbled below $250 against the dollar, mostly due to the cryptocurrency’s meteoric rise. Bitcoin has returned more than 1,000 percent this year so far, but most investors are still cautious, seeing it as an instrument of speculation.
Bitcoin is backed by the market’s trust in miners and blockchain technology, which is far from being solid. Also, Bitcoin does not enjoy central bank asset backing. Gold, however, could provide substantial backing to Bitcoin in the conventional markets, by eliminating risks of high volatility and making it easy to cash out of the cryptocurrency.
“The principle strengths of the gold exchanges based on the blockchain is that they are being developed by reputable organizations,” the Hutch Report said.
Earlier this month, US regulators allowed Bitcoin trading on the Chicago Board Options Exchange (CBOE). The cryptocurrency will be priced against the dollar. Meanwhile, Chinese regulators are expected to allow its largest Bitcoin exchange to resume operations in the second week of December.
Some investors and traders are concerned about the demand for gold, which might decrease if Bitcoin gains a greater prominence in the conventional financial markets. Last month, the number of internet searches for “buy bitcoin” had exceeded searches for “buy gold” for the first time in history.
While the dollar remains the universal method of settlements, both gold and Bitcoin find themselves at a disadvantage. A gold trade in dollars resembles a regular commodity trade, with a flavor of luxury to it. Bitcoin is very volatile because investors believe central bank asset backing is crucial for a currency to be sustainable.
However, the price of Bitcoin gold has proven far less volatile in recent months, whilst being fully determined by open-market fluctuations. Bitcoin gold pricing is also not susceptible to governmental and central bank interference.
“Ventures with the strongest management teams look to be the most compelling. For this reason the exchanges; Bankchain Precious Metals, Goldmoney, The Royal Mint and Tradewind, look solid. Among the gold backed cryptocurrencies, we will be following the launch of BullionCoin,” the Hutch Report observed.
This suggests the price of Bitcoin gold could provide a solid foundation to international trade and economic growth if it becomes the new global regime of settlements – replacing the dollar and other fiat currencies.