Why bitcoin may be the new gold for savvy investors

Michael Edesess says bitcoin’s rapid gains don’t necessarily make it a bubble, and its price could keep rising because investors see it as a store of value, given its independence from inflation

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Bitcoin’s value has doubled four times this year, from US$1,000 to US$16,000. Photo: Bloomberg

Published: 12:51pm, 12 Dec 2017Updated: 6:17pm, 12 Dec 2017

Bitcoin’s price has doubled four times this year, from US$1,000 in early January to over US$16,000. An Atlantic magazine headline asks: “Is bitcoin the most obvious bubble ever?”

Rapid increases in price alone do not prove a bubble, especially when conventional valuation is virtually impossible. There is a reason, however, why bitcoin could continue its rise – and this offers a means for comparative valuation: bitcoin may be the new gold.

Economic convention says money has three properties: it is a medium of exchange, a unit of account and a store of value.

Despite original high hopes, bitcoin is not ideally suited as a medium of exchange, because the database that keeps track of bitcoin transactions – the blockchain – is very limited in the number of transactions it can hold.

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Nevertheless, new developments, such as Litecoin, provide features offering the equivalent of a current account to bitcoin’s savings account. Bitcoin is much quicker for international transactions.