Interesting read
http://www.wsj.com/articles/bitcoin-catches-on-with-gold-bugs-1463959897Bitcoin Catches On With Gold Bugs
Digital currency is increasingly popular with investors who question stability of paper money
Kanishka Sukumar, a consultant who works in midtown Manhattan, says his parents often stash money in gold for safekeeping. But the 24-year-old thinks there is a better place for his savings.
"In times of financial turmoil, I would prefer to see a portfolio full of bitcoin,” said Mr. Sukumar, who holds about one-third of his wealth in the digital currency.
Bitcoin is gaining traction with modern-day gold bugs who question the stability of paper currencies or worry about protecting their savings during the next financial crisis.
A recent survey of 3,500 bitcoin users found that one in five hold the cryptocurrency because they don’t want banks or the government “controlling my money,” according to data provider CoinDesk. That was the second-biggest reason for holding bitcoin, behind owning it as an investment.
Since its inception seven years ago, bitcoin has shared an appeal similar to gold’s for those who want to hold their money outside of central authority. But as its dramatic price swings have eased, bitcoin has started to look like a more viable store of wealth to some of its fans.
“It’s an ‘I-don’t-trust-people’ purchase,” said Michael Novogratz, a bitcoin owner and hedge-fund manager who left Fortress Investment Group LP last fall.
He thinks bitcoin can attract some of those people who would otherwise turn to gold. While Mr. Novogratz said he has a “significant” holding in bitcoin, he owns only one ounce of gold, which, he added, was a gift.
In April, volatility in bitcoin’s price fell below that of gold for 28 consecutive days, the longest period in its history. Bitcoin volatility also briefly dropped below that of another flight-to-safety trade, the Japanese yen, according to data from FactSet and CoinDesk.
Bitcoin has become popular for fast, anonymous transactions. The number of bitcoin wallets, or electronic accounts used for paying with the cryptocurrency, doubled in 2015 to more than 12 million, according to data provider CoinDesk.
The cryptocurrency has also attracted traders looking to profit from its sometimes volatile price movements. The New York Stock Exchange tracks bitcoin’s price, and the derivatives marketplace CME Group said this month it is developing a bitcoin spot-price index.
Murat Akdeniz, a 25-year-old business student at Cornell University, said his daily bitcoin trading activity has declined with bitcoin’s volatility. Now it makes more sense to buy and hold the currency, of which he owns about 10 coins, he said.
Bitcoin’s increasing acceptance also reflects his generation’s growing trust of technology over governments, said Mr. Akdeniz. "If China decides to sell their gold reserves, my bitcoin price won’t be affected negatively,” he added.
Some investors cited economic uncertainty as another reason to hold bitcoin, especially as recession fears have roiled markets and central banks around the world have cut interest rates into negative territory.
Bitcoin has become “a store of value for those concerned about other asset classes,” said Gil Luria, head of technology research at Wedbush Securities. “Gold used to be the only refuge for those who have grave concerns over the global economy and monetary system.”
Gold is often viewed as a haven, with many investors trusting it to hold its value better than paper currencies. During the Greek crisis last summer, investors looking for safety flooded into both gold and bitcoin, traders and bitcoin exchange firms said.
“I like [bitcoin] as a hedge against an economic collapse,” Brian Estes, a 48-year-old venture capitalist in St. Louis, said. Holding the digital currency, he added, is like having a “hedge against the ATMs and the banking systems not being functional for a while.”
Not everyone is convinced bitcoin’s future is bright. The cryptocurrency faces regulatory hurdles around the world and in the past suffered from wild price fluctuations. It was used on the former online black market, Silk Road, for illegal drug purchases, law-enforcement officials have said.
Some are more bullish on the technology that underpins bitcoin than the digital asset itself. Peter Grosskopf, chief executive of Sprott Inc., said the blockchain system—a data structure that makes it possible to create and share a digital ledger of transactions—behind cryptocurrencies has the potential to improve gold transactions. But he doesn’t see any tangible value in bitcoin.
“We will invest in the digitization of gold, but we’re going to stick with gold,” Mr. Grosskopf said.
The gold market dwarfs bitcoin. The amount of money in bitcoin is estimated at $6.8 billion by bitcoin wallet provider Blockchain. The over-the-counter gold market trades between $150 billion and $240 billion a day, according to the World Gold Council. Holdings in gold-backed ETFs are close to $80 billion.
Murray Stahl, chief investment officer of Horizon Kinetics, which manages $6 billion in assets, said as bitcoin becomes more established, he plans to buy more cryptocurrencies in place of gold.
Horizon Kinetics holds shares of Bitcoin Investment Trust , the first publicly traded bitcoin investment vehicle. Mr. Stahl said his exposure to bitcoin comprises between 0.5% and 1% in several portfolios, compared with 3% to 4% holdings in gold-related securities.
“I’m not ready to give up entirely on gold,” Mr. Stahl said. But “in the next 10 years, there will be a cryptocurrency alternative.”
