In the final days of 2017, Bitcoin captured the attention of global markets when the price of a single digital coin surged to a record-high price around $20,000. While the price of Bitcoin has since pulled back (to around $14,600 today), there is one market indicator that suggests digital assets will remain bullish in 2018 — the price of gold.
One cannot overstate the role that ‘bad money’ has played in the explosion of demand for digital assets. Though the mainstream financial press often frames the digital asset boom as a product of blockchain technology’s faster transaction speed or greater anonymity, typically neglected is any mention that this rise has also been driven by the fact that many nations do not have their own currency house in order.
As Investopedia noted in October 2016, China’s devaluation of the Yuan played a crucial role in Bitcoin’s early price surges:
The price of Bitcoin has recently surged at times when the Chinese government has devalued the Yuan. China has strict capital controls, which it makes it difficult for Chinese citizens to convert their Yuan in to foreign currency. Bitcoin, however, is hard to trace and knows no borders, making it a prime vehicle for offshoring money. China also accounts for close to 90% of all bitcoin trading volume on exchanges, and Chinese miners also control a large proportion of the mining power – which is how new bitcoins are minted. Some believe that the price of Bitcoin will continue to rise as more devaluations are expected from the Chinese government, in hopes to stave off a recession.
And China is not the only country whose currency woes are driving the digital asset boom. Last fall, The Atlantic reported on related developments in Venezuela:
In Venezuela, home to some of the worst hyperinflation since the Weimar Republic, a Big Mac costs about half a month’s wages. Or rather, it did, until a bread shortage forced the burger off the menu. The annual inflation rate is expected to hit 1,600 percent. Life resembles an old newsreel: long lines, empty shelves, cashiers weighing stacks of bills.
To survive, thousands of Venezuelans have taken to minería bitcoin—mining bitcoin, the cryptocurrency. Lend computer processing power to the blockchain (the bitcoin network’s immense, decentralized ledger) and you will be rewarded with bitcoin. To contribute more data-crunching power, and earn more bitcoin, people operate racks of specialized computers known as “miners.” Whether a mining operation is profitable hinges on two main factors: bitcoin’s market value—which has hit record highs this year—and the price of electricity, needed to run the powerful hardware.
Electricity, it so happens, is one thing most Venezuelans can afford: Under the socialist regime of President Nicolás Maduro, power is so heavily subsidized that it is practically free. A person running several bitcoin miners can clear $500 a month. That’s a small fortune in Venezuela today, enough to feed a family of four and purchase vital goods—baby diapers, say, or insulin—online.
As these examples show, the rise of digital assets is partially attributed to failings of worldwide currencies. Global devaluation of money is breeding the desire for a digital ‘currency’ with the potential to appreciate in value.
Which brings me to my bullish market indicator for digital assets — gold prices. The price of gold has risen by roughly $100/oz since President Trump was inaugurated (from ~$1,200 to ~$1,300). Should the dollar’s value continue its decline against gold in 2018, it stands to reason that more Americans will take the risk of entering the Wild West digital asset market in hopes of alleviating the devaluation of their money.
If these trends continue, 2018 will be another good year for digital assets. But whether Bitcoin — or one of its growing competitors such as Ethereum, Ripple, or an entirely new digital asset altogether — will capture this increased market share is yet to be seen. This will surely be an exciting show to watch.