Cryptocurrencies have surged onto the scene in late 2017, led by a huge rally in bitcoin the most popular and liquid digital currency. With a market cap of more than 275-billion, bitcoin is gaining recognition from regulators, and is attempting to become a mainstream investment. On Sunday, December 17, 2017, The Chicago Mercantile Exchange released bitcoin futures and a week early the Chicago Board of Options Exchange released their own futures on bitcoin. Gold prices have slumped as investors sold gold and bought bitcoin as an investment vehicle that provides an alternative currency. The question is how much further can gold suffer relative to bitcoin prices?
Is Bitcoin a Currency?
Bitcoin is a digital currency that records every trade using a software called blockchain. The inventor of blockchain also invented bitcoin to be used as a digital coin for software created on the blockchain platform. You can think of bitcoin as a $50 bill where you were able to see every time this bill was exchanged since inception.
Are Cryptocurrencies a Flash in the Pan?
There are several high-profile banker and policymakers that have describe bitcoin as a fraud. The Chairman and CEO of JP Morgan Chase has referred to bitcoin as fad and the results with be like the tulip mania that occurred in the 1,600’s.
Is Bitcoin Stealing Golds Luster?
Gold prices began to slide in early September as the price of bitcoin began to rally. The chart of the ratio of bitcoin prices versus gold prices (bitcoin divided by gold) has surged and is currently at all-time highs.
The rally in the cryptocurrency space, has taken funds away from gold, but can this phenomenon last?
Is the Ratio Overextended
Markets such as bitcoin can remain exuberant for lengthy periods, but fortunately, you measure how far the market can stretch is by using an indicator called the relative strength index (RSI). RSI, is a momentum oscillator that measures overbought and oversold conditions. The calculation generates an index from 1-100 where level above 70 are considered overextended and overbought while levels below 30 are considered oversold. The current RSI reading of the ratio of bitcoin to gold is at 81, which is well above the overbought trigger level and could foreshadow a correction in the ratio.
This analysis makes the argument that bitcoin has stolen some of golds thunder, and the move is potentially overextended. This does not mean that bitcoin will now begin to fall to earth, but it does mean that gold prices are undervalued relative to bitcoin and could foreshadow a correction in the relative value of gold to bitcoin.