What’s up with Bitcoin?

At the end of 2015, the electronic currency called Bitcoin was trading for about $430. It was over $700 early this week. As of Wednesday, its price was around $686, up almost 60 percent year to date. What is going on?

The concept for the value of Bitcoin is based on a mathematical algorithm rather than being associated with any national currency. As such, its price depends on supply and demand. It has no intrinsic value.

The lack of a tie with any government currency is part of Bitcoin’s appeal. In recent weeks, reports are that more than 90 percent of worldwide trading volume for Bitcoin is occurring in China. Why is that?

China’s economy has been slowing down over the past year or so. The Shanghai Stock Exchange Composite Index is about 40 percent lower than it was a year ago. China’s banks are finally revealing to some degree the extent of bad loans they are carrying on their books at 100 percent of face value. In addition, there are some concerns in that country as to the stability of the Chinese yuan and also of the U.S. dollar.

For several years there has been huge demand both by the Chinese government and private citizens (as encouraged by the government) to acquire physical precious metals. In recent years, China has displaced India as the world’s largest gold consuming nation.

However, Chinese demand for gold has tapered off in recent months after prices started to rise in 2016. It looks to me that the surge in Bitcoin demand is coming from Chinese citizens who are seeking a safe haven asset outside of Chinese stocks, the yuan and the dollar. While they are still buying large quantities of gold, Bitcoin has also become an alternative safe haven asset.

I am often asked what I think of Bitcoin. That is not something about which I am an expert. I do anticipate that future currencies are likely to be mostly electronic. Having said that, though, I am not particularly confident that early versions of electronic money are likely to end up being the optimum long-term viable currencies. Consequently, I recommend checking with others for a more helpful evaluation of the future prospects of Bitcoin.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). His radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).

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