Finding an investment that protects your capital when stock markets plunge is no easy task for investors.
Could a new “digital currency” called Bitcoin, which last week briefly became more valuable than gold, be the answer after soaring in value over the past year?
The strong returns, mainly made over the past three months, have not gone unnoticed. Earlier this week it emerged that the Royal Mint was considering issuing physical Bitcoins, which could force the Government to accept them as an official currency.
Bitcoin, an online currency that was created by Satoshi Nakamoto in 2009, has soared in value over the past three months, with a single Bitcoin rising from $100 to more than $1,200. Investors have flocked to the currency amid fears that America’s central bank, the Federal Reserve, will begin to unwind its money printing policy, formally known as quantitative easing, in the coming months.
This is expected to lead to both shares and bonds falling in value as global stock markets have been propped up by the Fed’s aggressive policy.
The rush of money out of global stock markets is expected to flood into “safe haven” assets, which help shield capital in times of stock market distress. Traditionally popular safe haven assets have been currencies such as the US dollar and commodities such as gold.
Bitcoin has been touted as an online version of gold – which is partly why it has made huge gains over the past three months. The fact that the currency is designed to be immune from manipulation and government interference is also seen as a positive by investors.
A further similarity is that “supply” is limited – Bitcoins are produced by complex computer programs and their number has been limited to 21 million. About half of that number have already been produced. Each unit of the currency is tracked by the computer network to ensure that the limit cannot be breached.
On November 29 a unit of the currency briefly became more valuable than an ounce of gold, hitting a hitting a peak of $1,242.
In contrast to Bitcoin’s strong returns in 2013, gold has had a torrid time. In September 2011 it was trading at a record high of almost $1,900, but has since dropped by around 35pc to about $1,230.
Improving economic conditions have been cited by many commentators as the reason for gold’s recent weakness. Others argue that investors have decided to take profits after such strong performance.
But before you swap your gold for Bitcoins, bear in mind that the currency is susceptible to sharp falls in value. Almost immediately after it become more valuable than gold, Bitcoin collapsed by 10pc, as some investors feared the currency had entered a “bubble”.
Investors should bear in mind that cybersecurity threats also plague Bitcoin. And if things go wrong you will not have the regulator or ombudsman to fall back on.
But for those investors who fancy a punt, Bitcoin trades on eBay and other specialist sites.