China has, for a long time now, been buying tons of gold, literally, in anticipation of the future. There are a lot of speculations in why China is doing such a move, especially since the CEO of CitiGroup made a statement recently claiming that "gold is in a 6,000 year bubble". One theory about China's move towards gold is that they are going to back the Renminbi with gold. However, one of the more likely theories is that China is anticipating and protecting themselves financially from what they believe to be a future dollar collapse. China is using the oldest trick in the book to protect their wealth by buying commodities, a method that has over and over again stood the test of time for keeping, or even increasing, its value through times of great uncertainty.
If the US dollar were to collapse as some people and even countries fear, history tells us that the price of gold would skyrocket due to the flight to safety by investors into safer assets such as commodities. With an increased price in traditional commodities due to market forces, an interesting question can be raised if investors, or even countries like China, would then consider investing in Bitcoin. Bitcoin could be attractive as a less overvalued than the standard commodities like gold.
Step by step
If supply and demand acts as it has in history during times of chaos, let's ponder how investors might react. If investors, and the general mindset of people acting on the stock market, is that chaos and turmoil is in the air they would not be inclined to invest in assets that usually perform poorly during these times. Therefore let's assume there is a flight of capital into safer assets, such as commodities. With increased buying pressure comes a natural increase in the price for buying these assets. This process will make the demand harder to meet and the price will increase until it is no longer feasible to invest in the chosen asset or there is no more of the asset on the market to be bought. For commodities, like gold and silver there are even questions being raised about how much physical gold and silver actually exists compared to the paper market for these assets. I will not go more into details about this here, but it would be a valid topic of its own. If there is insufficient physical gold to fill all the paper orders in the market, we would see the price of the physical commodity increase dramatically.
With the demand for gold being higher than supply, investors might be inclined to start looking into other ways to ensure the value of their portfolio without having to buy fiat based assets or other assets that are not historically good investments during times of great instability. This opens up the question: what alternatives would investors consider, and mainly, if they would consider bitcoin.
Could a country consider bitcoin as a store of value?
What gives a commodity such as gold its value is amongst other things that it has a finite supply and that it is impossible to duplicate. Here bitcoin shares many of the same characteristics as gold in that it is finite and incredibly expensive to duplicate.
One critical difference between these two assets however is that bitcoin is not impossible to counterfeit (or in the case of Bitcoin: double spend), whereas there is no know way to counterfeit actual physical gold. Therefore, for a country to even consider investing in Bitcoin they have to take into consideration if it would be possible for anyone to manipulate the value of Bitcoin significantly. So that opens up the question, is it?
Current robustness of Bitcoin
As of today, if you would like to bring down Bitcoin, you would have to invest 574,261,307 US dollars according to Coinmetrics. This is no small investment, but without comparing it to relevant data, it does not really say much. Therefore, lets compare it to which countries that are actually investing enough money into their military on a yearly basis to have the financial capability needed to control the Bitcoin network. This comparison puts Bitcoin at the 76th place in the world compared to other countries [Coinmetrics, December 2014]. In this comparison, it places just before Slovenia and just behind Tunisia. What this means is that if Slovenia would invest all of their yearly budget for military into an attempt to bring down the Bitcoin network, they would just not have the financial means to do so, but Tunisia would.
How robust would Bitcoin need to be?
If any country would seriously consider Bitcoin as a safe investment they would need to be quite confident that other entities would not be able to gain control of the network. For example, the United States is currently the country spending most on a yearly basis on their military. They are spending more than 800 times what would be needed to bring down the Bitcoin network. This means that the United States would not even need to invest close to one percent of their current yearly military spending to achieve this goal.
For any country to consider Bitcoin as a safe long term investment to protect against uncertainty the Bitcoin network would need to become much more secure. If a big portion of the world's countries have the financial capabilities to bring down the Bitcoin network, Bitcoin cannot be considered as a safe investment in its current state. However, if the robustness of the Bitcoin network increased significantly, so that there would be no single entity that would have the financial means to take control of the network, Bitcoin might start to look much more attractive for investors.
