Gold Regains Some Shine as Bitcoin Shows Vulnerabilities
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"The four most dangerous words in investing are 'This time it's different.'" - Sir John Templeton
For the better part of a year virtual currency bitcoin has been all the rage among investors looking for an inflation hedge alternative to gold. Gold, while the widely-known 'store of value' in times of trouble, has numerous setbacks that bitcoin has been able to overcome; Gold is not easy to store or move, it's not easy to exchange goods with, its out-of-the-ground supply is manipulated by gold producers. Meanwhile, bitcoin is stored virtually, is easy to transfer, and production will be capped at 21 million. Bitcoin, therefore, is not only being bought as a 'store of value' by speculators but as a 'medium of exchange' as more and more merchants accept the virtual currency.
While bitcoin has shown tremendous promise in its ability to attract merchants to exchange goods, recent problems with bitcoin exchanges pose a major threat to the entire bitcoin ecosystem.
Exchanges are crucial as they convert real-world fiat currencies (ie U.S Dollars, Euros, etc.) into bitcoin and visa-versa. Consumers put trust in the exchanges by transferring cash from their personal account to the exchange's third-party account. However, unlike U.S. and other global banks, there is no government protection. Hackers have already targeted exchanges and bitcoin wallets and there is risk that exchanges could run off with the cash before a currency conversion is complete.
On Friday, major bitcoin exchange MtGox temporarily halted all 'bitcoin withdrawals', or transactions from a MtGox bitcoin wallet to an external bitcoin address. While MtGox said transactions to any MtGox bitcoin address, and currency withdrawals were not affected, the news sent shock-waves throughout the bitcoin community and led to a plunge in the price of bitcoin. Today, MtGox followed up saying the halt was related to a bug in the bitcoin software which makes it possible for someone to use the Bitcoin network to alter transaction details to make it seem like a sending of bitcoins to a bitcoin wallet did not occur when in fact it did occur.
MtGox attempted to calm nerves, saying it is important to remember that bitcoin is a "very new technology and still very much in its early stages". They believe that the changes required for addressing this issue will be positive over the long term for the whole community.
While MtGox showed confidence in its ability to remedy the issue, for non-believers, the news of the bitcoin exchange trouble points to a deeper issue with the virtual currency itself and wide-spread acceptance of it.
While itself prone to wild price swings, gold has survived thousands of years as a widely-trusted currency and a store of value. Bitcoin threatens the core of why gold is a good investment at all. However, with problems like the ones witnessed in the past few days, the time-tested value of gold trumps the new and alluring promise of bitcoin.
The truth is, if normal, everyday consumers can't trust the bitcoin ecosystem it will be over before it ever really got started.
Gold is up 0.7% today to $1275.70, while Bitcoin is down 9.2% to $664.
For the better part of a year virtual currency bitcoin has been all the rage among investors looking for an inflation hedge alternative to gold. Gold, while the widely-known 'store of value' in times of trouble, has numerous setbacks that bitcoin has been able to overcome; Gold is not easy to store or move, it's not easy to exchange goods with, its out-of-the-ground supply is manipulated by gold producers. Meanwhile, bitcoin is stored virtually, is easy to transfer, and production will be capped at 21 million. Bitcoin, therefore, is not only being bought as a 'store of value' by speculators but as a 'medium of exchange' as more and more merchants accept the virtual currency.
While bitcoin has shown tremendous promise in its ability to attract merchants to exchange goods, recent problems with bitcoin exchanges pose a major threat to the entire bitcoin ecosystem.
Exchanges are crucial as they convert real-world fiat currencies (ie U.S Dollars, Euros, etc.) into bitcoin and visa-versa. Consumers put trust in the exchanges by transferring cash from their personal account to the exchange's third-party account. However, unlike U.S. and other global banks, there is no government protection. Hackers have already targeted exchanges and bitcoin wallets and there is risk that exchanges could run off with the cash before a currency conversion is complete.
On Friday, major bitcoin exchange MtGox temporarily halted all 'bitcoin withdrawals', or transactions from a MtGox bitcoin wallet to an external bitcoin address. While MtGox said transactions to any MtGox bitcoin address, and currency withdrawals were not affected, the news sent shock-waves throughout the bitcoin community and led to a plunge in the price of bitcoin. Today, MtGox followed up saying the halt was related to a bug in the bitcoin software which makes it possible for someone to use the Bitcoin network to alter transaction details to make it seem like a sending of bitcoins to a bitcoin wallet did not occur when in fact it did occur.
MtGox attempted to calm nerves, saying it is important to remember that bitcoin is a "very new technology and still very much in its early stages". They believe that the changes required for addressing this issue will be positive over the long term for the whole community.
While MtGox showed confidence in its ability to remedy the issue, for non-believers, the news of the bitcoin exchange trouble points to a deeper issue with the virtual currency itself and wide-spread acceptance of it.
While itself prone to wild price swings, gold has survived thousands of years as a widely-trusted currency and a store of value. Bitcoin threatens the core of why gold is a good investment at all. However, with problems like the ones witnessed in the past few days, the time-tested value of gold trumps the new and alluring promise of bitcoin.
The truth is, if normal, everyday consumers can't trust the bitcoin ecosystem it will be over before it ever really got started.
Gold is up 0.7% today to $1275.70, while Bitcoin is down 9.2% to $664.
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