With Bitcoin Losing Its Payment System Roots, Is Now the Time to Sell? Lombardi Letter 2017-11-27 07:10:33 SegWit2x’s Failure means Bitcoin won't scale properly for fast transactions 
 If Bitcoin isn't going to make payments fast and cheap why own it?
 Does Bitcoin's "Digital gold" status justify the valuation? We take a look at whether SegWit2x was a negative or positive for the Bitcoin community and compare Bitcoin with gold to determine the better investment. Bitcoin,News

With Bitcoin Losing Its Payment System Roots, Is Now the Time to Sell?

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SegWit2x’s Failure Means Bitcoin Won’t Scale Properly for Fast Transactions

Purchasing Bitcoin is currently very difficult and there are size limit restrictions. This is where SegWit2x was supposed to come in and solve the problem. It was going to make purchasing or selling Bitcoin an easier process. The new system was going to be able to handle a larger trade size. In addition, this new method of purchasing Bitcoin would have lowered the transaction cost.

The problem, however, is that the new platform for completing Bitcoin orders did not get approved. The developers behind SegWit2x have given up on the project and have moved to other ventures.


The major reason why SegWit2x was not approved was that there was not a strong consensus in the Bitcoin community. This has left a negative image on the Bitcoin world because it shows that there is no willingness for any change to make the digital currency much more tradable.

This will keep things as they are, meaning traders and investors have to stick to the current method of completing orders.

If Bitcoin Isn’t Going to Make Payments Fast and Cheap, Why Own It?

For something to be available to the masses, it must be very easy to execute a trade, it must be fast, and it must be as cheap as possible. These conditions would all have been met if SegWit2x were approved as a software trading platform. However, not going through with the new platform shows that Bitcoin is not ready to have retail investors involved in the cryptocurrency.

Since there are a ton of other cryptocurrencies, investors and traders could simply decide to participate in a more user-friendly digital currency than Bitcoin. So all is not lost with SegWit2x technology; it could be used for another digital currency and then adopted by retail investors.

Because the Bitcoin community wants to stay as tight as possible and not allow retail investors to trade or invest in Bitcoin, this creates the concern that more rules will be added down the line to restrict Bitcoin even further. The only reason to own Bitcoin would be for speculation purposes and no investment has turned out great when there is a lot of hope behind it. Therefore, there would not be a strong thesis behind such an investment.

Does Bitcoin’s “Digital Gold” Status Justify the Valuation?

The value of one bitcoin is trading above $9,500, while the value of one ounce of gold is approximately $1,300. Both Bitcoin and gold are used presently as a hedge against the real estate market, the stock market, political uncertainty, and the economy. Let’s take a look to determine if Bitcoin (aka “digital gold”) can be put in the same category as actual gold.

To do this, we need to look at three different areas: price history, demand, and preservation of capital.

First off, taking a look at price history, Bitcoin is trading at its all-time high. Therefore, there is no discount based on its historic value. If investors wanted to purchase Bitcoin, they would have to pay the full price. The price of gold, on the other hand, is trading at roughly 30% lower than its 2012 highs. In this case, there is more value in the price of gold.

The second area we look at is the demand for the precious metal and the digital currency. In the third quarter of 2017, central banks around the world purchased 111t of the precious metal, which accounted for a 25% year-over-year increase. This was to ensure their local banking systems were protected and that there would be a control on inflation and the local currency. Also, investors from around the world are picking up gold to add to their portfolio to protect from any political and investment risks. (Source: “Gold Demand Trends Q3 2017,” World Gold Council, November 9, 2017.)

In the case of Bitcoin, institutions and central banks have not participated in any of the price movements of the digital currency. Presently, the price is moving daily by individuals known as “whales.” This simply means there is a select group of investors that have large investments in Bitcoin and control the price movement. This results in no increased demand; it is more a game of wealthy individuals controlling their wealth.

It is currently in the works that CME Group Inc (NASDAQ:CME) and Chicago Board Options Exchange (CBOE) are launching a Bitcoin future contracts investment. This would add much more speculation and no real customer demand for the cryptocurrency.

The last area we look at is the preservation of capital. Since 1971, gold investors have seen historic returns of 10.6%. Over the past 10 years, the average return has been over seven percent. Gold could be summed up as an investment with steady gains that adds wealth to investors’ bottom lines over time. (Source: “Enhancing the Wealth of Nations: Gold and Sovereign Wealth Funds,” World Gold Council, September 27, 2017.)

Since Bitcoin does not have as long a history as gold, a shorter time frame will be used to determine the preservation of capital. Presently, the daily average volatility is near 4.8%, which simply means there could be huge swings seen on a daily basis. A recent example is in early November, when the price of one bitcoin went from trading around $7,400 to under $6,000 in the matter of a week. This is not the first time the cryptocurrency has seen double-digit negative returns in a short period of time; in October, there was a one-week period where it saw a -14% return. (Source: “The Bitcoin Volatility Index,” Buy Bitcoin Worldwide, last accessed November 27, 2017.)

With the current method of buying Bitcoin, there is a lot of speculation, which results in Bitcoin not being identified as a valid currency. The reason for this is because the value of a currency must hold its value day-to-day. For instance, $1.00 should be worth roughly $1.00 tomorrow or one week from now. The reason why preservation of capital is important is that this will create long-term value.

To conclude, there are a lot more positives and certainty with an investment in gold over Bitcoin. Also, gold has a purpose in our lives such as being used for jewelry, medical reasons, or in aerospace. Bitcoin is just an online cryptocurrency with no additional purposes. Gold and Bitcoin should not be put in the same category, even though investors may think both are a hedge against traditional investment portfolios.

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