Bitcoin Price Rises Higher Than Gold… But Its Value Is A Different Story

Indian Belfrics CEO of Praveen Kumar addresses a press conference during the launch of the firms’s Indian Bitcoin exchange operations in Bangalore / AFP / MANJUNATH KIRAN/Getty Images

Since hitting a record-low of $177 in January 2015, Bitcoin is up almost 600%.

On March 2, 2017, it reached a new high of $1,268 per unit—thus surpassing the price of an ounce of gold for the first time ever.

So, what’s the driving force behind this parabolic rise?

The More Dimwitted Governments Act, the Better It Is for Bitcoin

Since the beginning of last year, almost all Bitcoin trading has originated from China. This trend coincides with the introduction of capital controls. Since Beijing first enacted the controls in March 2016, over 90% of Bitcoin trading has been done through yuan.

Deutsche Bank

Deutsche Bank

In its short history, Bitcoin’s price has risen during episodes of monetary folly—as we’ve seen when similar capital controls were enacted in Cyprus and Greece in 2013 and 2015, respectively.

You could say it acts as a kind of “fear gauge” of public faith in fiat currencies and central banks.

A 2016 study found that 20% of Bitcoin users owned the currency because they “didn’t want banks and governments controlling their money.” This was the second-most cited reason for owning it behind “investment purposes.”

In that sense, Bitcoin is comparable to gold. However, in many ways they are polar opposites.

Bitcoin Is a Store of Volatility

Gold has been a wealth preservation tool and a store of value for 2,500 years. Bitcoin was created in 2008 and has experienced large downside moves ever since. In the first week of 2017, Bitcoin dropped by over 30%.

A major reason for Bitcoin’s volatility is its small market size. The average daily trading volume (ADTV) of Bitcoin is $32 million. In comparison, the ADTV of the largest gold ETF (GLD) is $845 million.

This chart shows just how small the market for Bitcoin is when compared to gold.

Goldmoney, Bloomberg, FRED

Goldmoney, Bloomberg, FRED

Given the low ADTV, it’s impossible to buy $2 million worth of Bitcoin on any given day without moving the market. It is estimated that it would take only $50 million to dominate the Bitcoin market for five minutes. As such, there is huge potential for manipulation.

There have been attempts to expand the size of the market with the creation of a Bitcoin ETF. This would add liquidity and ease to investing in Bitcoin.