Bitcoin is racing towards the $1000 mark again. And the recent currency policies of India’s Modi and Venezuela’s Maduro may have something to do with it.
How? By pushing people into Bitcoins—the digital currency rally coincides with Modi’s and Maduro’s efforts to get rid of old currency notes.
Prime Minister Modi and President Maduro have very little in common – except they have pursued policies recently that replace large notes in circulation with new notes (India) or with coins (Venezuela).
For a good purpose, of course. Prime Minister Modi has been trying to fight corruption, a widespread problem in India. And President Maduro has been trying to fend off capital flight from the ailing Venezuelan economy.
While both policies have had some success in achieving their objectives, they’ve had a serious side effect, too: undermining public confidence in national currencies as a store of wealth. Why hold a currency that can be printed in unlimited amounts and which has an expiration date?
Of course, the public can hold dollars, euros, yen, and yuan, but those can be manipulated, too.
That’s not the case with Bitcoins, which cannot be manipulated by governments, and therefore, can serve as a good alternative to national currencies.
Of course, there’s gold, too. But Bitcoins have a couple of advantages over gold. First, they can be used as a convenient medium of payment, though for a limited number of transactions, a function gold is missing. Second, the Bitcoin supply is expected to be limited to 21 million. The supply of gold, on the other hand, may be expected to increase anytime its price rises, as that provides an incentive for gold miners to mine for gold.
To be fair, gold has its own advantages, too. It can be used as an outright gift, to make jewelry, and in manufacturing of certain products.
Still, Bitcoin has been beating gold by a big margin so far this year.The digital currency has more than doubled in value, while the yellow metal has gained 8.43 percent; and both assets outperformed the S&P 500, and the twenty-year US Treasury bonds, which headed south.
Does this make Bitcoin a better long-term investment than gold?
It’s hard to say, as past performance isn’t a guarantee for future performance. Besides, Bitcoin has only been around for a short period of time, and its performance is rather erratic.
That’s why investors shouldn’t rush to substitute the yellow metal for the digital currency in their portfolio. But if they have done so in recent months , they should send a thank you note to Prime Minister Modi and President Maduro.
Panos Mourdoukoutas is Professor and Chair of the Department of Economics at LIU Post in New York.