Bitcoin is soon becoming as safe a haven as gold, say analysts.
In recent weeks there has been a rapid increase in the price of cryptocurrency. Touching levels not since February 2014, it traded above $730 per bitcoin at the end of last week.
Since bitcoin shares many of the characteristics that makes the precious metal a great store of value, the cryptocurrency could be referred to as digital gold, says Chris Burniske, a blockchain analyst and products lead at investment manager ARK Invest.
“Bitcoin shares those same characteristics. “[Both have an] extremely limited supply and a relatively inert state. Bitcoin and gold can both be used: for example, gold is used in electronic circuits and bitcoin is used as payment,” Burniske told CNBC.
Burniske suggested investors should consider diversifying into bitcoin even as gold has performed well in recent months, rising 20 percent year to date.
“When you look at the global markets, there’s lots of fear, uncertainty and doubts. You’ve got people worrying about the equity markets [and] you’ve got people fleeing into bonds. While gold has had a bit of a run in 2016, over the last five year period it’s been a terrible performing asset,” he said.
“So you’ve got people starting to wonder where there are safe havens to store their assets. I think you have lot of people saying ‘Hey we want to diversify a little bit’ making allocations to bitcoin’,” he adds.
However there are others like Vijay Michalik, research analyst at consultancy Frost & Sullivan who seem to disagree and point out that bitcoin is still very volatile.
“Bitcoin is still such a new innovation that the economics of its value aren’t fully understood, and the price looks likely to remain moderately volatile in the medium term,” he told CNBC.
“Volatility and the long-term unknowns involved in bitcoin’s development stop it from being considered a safe-haven asset like gold. However, because bitcoin is unlinked to any one national currency or macroeconomic factor, it could be a good choice for portfolio diversification,” he added.
An upcoming change in cryptocurrency that will see bitcoin miners making less money for each block that they extract is seen as the primary factor for the recent rise in value of the digital currency. As fewer new coins enter the system, this is likely to tighten the supply of bitcoins.
“In early July, the annual rate of supply inflation will be cut from 8 percent to 4 percent. In basic economics, you cut the supply in half but demand continues to increase, which we’re seeing with bitcoin,” said Burniske.
However for investors looking for safety, gold remains a popular choice. The advantages of gold over other assets were explained by Adrian Ash, head of research at investment gold service BullionVault.
“Throughout civilisation gold has been viewed as a well-established safe haven used to store value by all cultures in all ages across the word and has never gone to zero in recorded history. As a physical asset gold cannot default or go bust and is protected by a strong property law which is simple, proven and universally understood,” he told CNBC.
(Adapted from CNBC)