Since 2017 began, no asset class has performed as well as cryptocurrencies. In fact, there's a really good chance that investors have never seen as good of a single-year performance as what virtual currencies brought to the table in 2017. By year's end, the aggregate market cap for all digital currencies had increased to $613 billion from a starting base of $17.7 billion. For you math-phobes, we're talking about an increase in value of more than 3,300%.
Bitcoin continues to lead the charge for cryptocurrencies
Leading that charge, as always, was bitcoin. Although bitcoin didn't log the highest percentage gain in 2017 among cryptocurrencies, it's certainly among the best-performing crypto assets of all time. Let's remember that nearly eight years ago it began trading at just $0.003, and in December 2017 nearly hit $20,000 per coin. This would have turned a $1,000 investment in March 2010 into billions of dollars less than eight years later!
Bitcoin gets its notoriety from being the first tradable cryptocurrency, as well as being accepted by more merchants around the globe than any virtual coin. It also brought blockchain technology into the mainstream. Think of blockchain as the infrastructure that underlies virtual coins and is responsible for logging all transactions without the need for a third-party provider (i.e., bank).
Also, bitcoin has soared as a result of a falling U.S. dollar, which hit multiyear lows against numerous global currencies. While a weaker dollar is bound to put a smile on President Trump's face, since it has a tendency to boost U.S. exports, it puts quite the frown on investors' faces since it devalues the cash they're holding. These investors typically seek the safety of a "store of value" when the dollar falls, which historically has been gold (or another precious metal). Lately, though, investors have been turning to bitcoin as that store of value.
Why bitcoin, you ask? The number of bitcoin tokens that can be mined is limited to 21 million, creating the perception that there is scarcity and finiteness. The same is true for gold. Given the over-1,300% gain that bitcoin delivered last year, it wasn't hard to convince investors to park their cash in bitcoin as opposed to gold.
Bitcoin is losing its luster to a considerably older asset
However, something really interesting happened recently when bitcoin suffered another of its mini-meltdowns -- bitcoin has plunged by at least 22% on 21 separate occasions since April 2013. Earlier this month, when bitcoin briefly dipped below $10,000 per coin and a mild bit of panic set in within the cryptocurrency space, sales of gold and gold coins surged, according to Bloomberg. Director Daniel Marburger at Frankfurt-based CoinInvest told Bloomberg that sales of gold coins jumped fivefold as bitcoin tanked.
The same is true of GoldCore, where Director Mark O'Byrne confirmed that clients have been diversifying away from cryptocurrencies and into gold coins and bars. Said Byrne in an email to Bloomberg: "They told us they were concerned that the massive price appreciation was unsustainable and they got nervous about it. We think increasingly people are realizing that these digital assets have much higher risk levels than the traditional safe haven asset."
Let this be a reminder: Bitcoin will never replace gold
Are you surprised to see investors abandoning bitcoin and putting that money to work in gold? Don't be, because bitcoin never had a genuine chance of replacing gold as the true store of value.
Let's start with the basics. First, you'll hear a lot of people discuss how bitcoin and gold are similar in that they're finite assets. In other words, gold is finite and scarce because what's currently on Earth (either mined or still in the ground) is all there will ever be. Likewise, bitcoin is a scarce and finite asset because there can be no more than 21 million virtual tokens minted. But this last statement isn't entirely true. Protocols dictate that bitcoin mining cease at 21 million tokens, but it doesn't dictate that those protocols can't be adjusted in the future to a higher token number. It's a finite total in name only.
To add to the previous point, bitcoin has forked into two separate currencies on numerous occasions. Since an 80% consensus from the bitcoin community is needed to move forward with major software upgrades to its blockchain, and that figure isn't always hit, new virtual currencies are spun off from bitcoin every now and then (Bitcoin Cash and Bitcoin Gold being more recent examples). That implies bitcoin is anything but a finite resource, because it continues to generate new coins via forks.
Second, the real-world uses for gold and bitcoin aren't even comparable. Gold has been used as a form of currency for more than 2,700 years, and while you can't march down to your local pizza shop and buy a pie with a gold bar, you can certainly turn your gold into dollars with relative ease. It also has real-world applications in the dental industry for crowns and filings, as well as in industrial applications as a conductor of electricity.
By comparison, bitcoin is only accepted by a relatively small handful of merchants around the world, so trying to live off bitcoin would prove almost impossible. Furthermore, it has no real-world uses since it's not a tangible asset. Since you can't hold a bitcoin, it has no other purpose other than to be used as a medium of exchange when buying goods and services.
There are also night-and-day differences when it comes to regulation. Gold is traded in organized financial markets, whereas bitcoin is traded in decentralized exchanges that can all have varying prices for the world's most popular virtual coin. The Securities and Exchange Commission has expressed concerns about cryptocurrencies that simply aren't there for investors of gold.
Feel free to call me biased, as I own quite a few gold and silver mining stocks, but bitcoin will never be able to hold a candle to gold as a store of value. It's just a matter of time, in my opinion, before other bitcoin investors see it that way, too.