Many investors expected Bitcoin to become the 'new' gold. The cryptocurrency was seen as a high-tech way to protect purchasing power from government shenanigans. Boy, was that wrong?
The Chinese Government Crashes Bitcoin
As many of you remember, the Chinese government has been dealing with a massive capital flight out of its currency, the yuan. This problem started with the election of Donald Trump to the American presidency.
Chinese investors have been dumping the yuan for dollars, euros, and gold. And in response, the Chinese government as restricted the importation of gold and conversion of yuan into other currencies. Unable to purchase gold, investors in China turned to Bitcoin, a cryptocurrency that operates on something called 'blockchain' technology.
Bitcoin was seen as a better option than precious metals because it is 'technically' impossible for the government to regulate it since it operates strictly online with complete anonymity. This anonymity allows the cryptocurrency to be used for money laundering and other criminal activities – this fact, along with its use as a way to move wealth out of China - made government intervention inevitable.
Early in January 2017, Chinese authorities announced plans to inspect Bitcoin enterprises. Because so much of the cryptocurrency trade has moved to China, this was enough to send the value of Bitcoin crashing 15 percent almost instantly.
What is the Lesson Here?
Cryptocurrency is not a viable alternative to gold. Despite what the price of gold may look like today, precious metals have retained value as a store of wealth for almost the entirety of human history - no other form of money comes close.
The value of Bitcoin may never recover due to fears of an impending Chinese crackdown. This headwind for Bitcoin is a massive tailwind for gold prices going forward and, I believe, a major reason why prices are recovering so nicely in 2017. As the demand for Bitcoin continues to fall, expect gold to move in the opposite direction.