It’s hard to compare the value of the world’s classic store of value—gold—with a digital currency that has no tangible existence. But on March 2, 2017, a watershed moment occurred because for the first time ever, one unit of bitcoin exceeded the value of an ounce of gold.
Bitcoin closed the day at $1,268. By comparison, gold ended trading at $1,233 an ounce.
Bitcoin’s attraction is obvious. In an era where governments are imposing negative interest rates and other measures of “financial repression” against savers, bitcoin offers a store of value that governments have no means to manipulate. What’s more, since bitcoin transactions occur “peer-to-peer” rather than through a financial institution, governments have no convenient way to monitor those transactions. Governments also don’t have the power to confiscate bitcoins as they can with bank or securities deposits.
Should you invest in bitcoin? It’s certainly not a risk-free proposition. Bitcoin’s value rose from zero to peak at nearly $1,000 a unit at the end of 2013. But then it lost more than 75% of its value in the next year. It has fully recovered since then, although the price remains volatile.
Other risks to bitcoin include theft (as in the infamous Mt. Gox heist, where hackers stole about half a billion dollars’ worth from what was, at the time, the world’s largest bitcoin exchange). Not to mention government crackdowns (as in the recent actions of the Chinese government to prevent wealthy citizens from using bitcoin to evade the country’s foreign exchange controls).
But I think the largest risk is the possibility that improved digital currencies will emerge. Bitcoin already has numerous competitors in this market: ethereum (heavily backed by software giant Microsoft), ripple (backed by Google), and many others.
Still, bitcoin is definitely worth considering if you’re tired of savings accounts that generate close to zero interest rates, or even negative rates in some cases. As always, when purchasing an asset with volatile values, the safest strategy is to buy a little bitcoin every week or every month. That way, you’ll automatically buy more when prices are low; less when prices are high.
The most important precaution to take with bitcoin is that you store it safely. You can store your bitcoin on one of the numerous exchanges that exist online, but this both raises your profile and increases the risk of becoming the victim of a Mt. Gox-type heist.
A better option is “offline” storage—on a flash drive or even printed on paper. You can then store your bitcoin in any secure location—a safe in your home, a safe deposit box, or a private vault.
However you purchase and store bitcoin, one thing is for sure: The age of digital currencies has arrived. And while I’m not sure that bitcoin will be the “gold standard” for digital currencies forever, it’s a great way to get started with them.