Bitcoin is taking speculators for a ride.
Bitcoin is a digital currency that was created in 2009. Unlike paper currencies, Bitcoin isn’t controlled by a government or central bank—it’s governed by a peer-to-peer network.
In the beginning, few people took Bitcoin seriously. But it’s become very popular with investors in recent years. That’s partly because more and more people are losing faith in the paper money system.
The business community is also embracing the digital currency like never before. More than 100,000 businesses around the world, including Amazon, eBay, and Target, now accept bitcoins as payment.
• In 2015, Bitcoin’s price surged 40%…
It was the year’s top-performing currency.
Last year, Bitcoin surged another 120%. It was the year’s best-performing currency once again.
Until recently, it looked like the digital currency was headed for a three-peat.
• Bitcoin’s price surged 20% over the first four days of 2017…
Last week, it topped $1,000 for the first time since 2013. And it got within $13 of its all-time high.
Frantic buying by the Chinese fueled the recent rally. Yahoo! Finance reported last Thursday:
The yuan fell 6% against the US dollar in the past year, hitting its lowest point since 2008. China’s foreign exchange reserves are expected to keep shrinking in 2017. It’s clear that as a result, many Chinese investors have turned to bitcoin: trading activity of bitcoin in the yuan is up more than 60% in the past 30 days, according to bitcoinity charts. More than 90% of all bitcoin activity globally, in fact, is coming from China.
In other words, Chinese folks loaded up on bitcoins because they’re worried about the money in their wallet losing value. They’re not alone, either.
• Venezuela’s currency, the bolívar, is in free fall…
According to CNNMoney, it lost 55% of its value in November.
Today, prices for everyday goods and services in Venezuela are more than doubling every month. Storekeepers in the country are now weighing out piles of cash rather than counting the money.
In India, locals are worried that there could be a national bank run. That’s when everyone tries to pull money out of the banking system at once.
Not to mention that central banks in Europe and Japan are still trying to stimulate their economies through easy-money monetary policies. As we’ve explained many times, these radical measures could end up destroying the very currencies these central banks are supposed to protect.
• In short, people have plenty of reasons to be worried about the money in their wallet…
That’s why the price of Bitcoin shot through the roof recently. But many of these folks had no clue how volatile this digital currency could be.
• The price of Bitcoin plunged by more than 20% last Thursday…
The People’s Bank of China (PBOC) sparked the crash after it told investors to be wary of digital currencies.
Yesterday, Bitcoin plunged another 13%. The PBOC, once again, ignited the selloff. Reuters reported yesterday:
The price of digital currency bitcoin slid around $50 on Wednesday after China's central bank said it had launched spot investigations on bitcoin exchanges in Beijing and Shanghai in order to fend off market risks.
The investigation of bitcoin exchanges, including BTCC, Huobi and OKCoin, was to look into possible market manipulation, money laundering, unauthorized financing and other issues, according to the statements posted on the People's Bank of China's website.
• Today, Bitcoin is down another 5%…
It’s now lost more than a quarter of its value over the past week. That’s a staggering decline.
Remember, bitcoin is supposedly a currency. But currencies should never be this volatile.
This tells us that Bitcoin isn’t money yet. It’s still a speculation vehicle.
If you know what you’re doing, you could make a fortune trading Bitcoin. But if you don’t, you could lose a lot of money very quickly.
That said, we still think Bitcoin is a step in the right direction. After all, anything is better than money controlled by reckless and increasingly desperate governments. But Bitcoin and other digital currencies like it have a long way to go before we’re ready to call them “money.”
• Gold, on the other hand, is a proven form of money…
People have bought and sold goods and services with it for thousands of years. It’s survived every sort of financial crisis. And it’s outlasted countless paper currencies.
Plus, gold’s value is stable. It’s not going to plunge 25% or more over the course of a few days. There also isn’t a central authority in the world that controls gold’s price or its supply. It’s a truly global currency.
That’s why gold is still the best way to protect yourself from reckless governments and central banks.
• The price of gold has spiked 5% since the start of the year…
It’s now trading above $1,200 an ounce for the first time since November. But we think it could be headed much higher.
Remember, central banks around the world are losing their grip on their currencies.
If this keeps up, more and more people are going to seek out alternative currencies. Many of them will take shelter in gold, the world’s most trusted safe-haven asset.
If you’ve been meaning to buy physical gold, we encourage you to first watch this new interview with Casey Research founder Doug Casey.
As you’ll see, the U.S. government is working on a secret project right now that could radically transform America’s monetary system. According to Doug, this could be the worst thing to happen to the U.S. dollar since the end of the gold standard. Click here to see why.
Chart of the Day
Beware of leveraged exchanged-traded funds (ETFs).
Leveraged ETFs allow traders to amplify returns through—you guessed it—leverage. There are leveraged funds that track the price of oil, the U.S dollar, and even gold stocks.
Some of these funds offer 2x leverage. In other words, they’ll rise 2% when the underlying asset they track rises 1%. Other funds are leveraged 3-to-1, or 3x.
Due to their high risk and construction, most traders don’t hold these kinds of funds longer than a few days. But, even then, they can still be incredibly risky.
To help you understand why, we put together the following chart. It compares the weekly performance of an unleveraged ETF (1x) with a leveraged one (3x).
Let’s pretend that both funds track the same basket of gold stocks. On Monday, both funds close the trading day at a share price of $100. On Tuesday, the basket of gold stocks jumps 10% in value. On Wednesday, it falls 10%. On Thursday, it rebounds 10% before falling 10% again on Friday.
At the end of the week, the unleveraged fund is worth $98. The leveraged fund, meanwhile, has fallen to $83. In other words, it lost almost nine times as much as the unleveraged fund.
It’s important that you remember this.
You see, many investors buy leveraged funds hoping to get rich quick. But few realize how quickly losses can pile up.
If you want to boost your returns, we encourage you to avoid leveraged funds. You’re much better off investing in world-class companies that, for one reason or another, are trading at deep bargains. This is a much less risky way to generate big returns.
Delray Beach, Florida
January 12, 2017
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