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Since the crisis in Cyprus erupted a few weeks ago, Bitcoin has made new highs on fear of the deposit debacle in the Cypriot banking system. Since Bitcoin was founded in 2008 at a price close to zero, it has now reached new all time highs of $160/Bitcoin. Now that Bitcoin has made new all time highs, I'm suggesting to diversify these gains into silver (NYSEARCA:SLV).

Max Keiser points out that there is a relationship between silver and bitcoin. Bitcoin and silver are a natural hedge against each other because both are hard currencies. If one of them goes up too much, the other will eventually follow. So if Bitcoin goes up too much (which is happening right now), you should switch some of that Bitcoin money into silver as Max suggests.

Max Keiser: "Silver is the natural hedge of Bitcoin." (Starts at 3:18)

Today, silver has a total market capitalization of $29 billion if you count all the silver ETFs together (as Max Keiser points out) (chart 1). It's still very small against, for example, the oil market.

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Chart 1: Silver ETF Market Capitalization

On the other hand, Bitcoin has a much smaller market capitalization of $1.6 billion at $160/Bitcoin, despite its huge run-up lately. You can follow the market capitalization of Bitcoin on chart 2.

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Chart 2: Bitcoin Market Capitalization

If you compare the Bitcoin and silver ETF market capitalization with each other, they are now at a ratio of: 29/1.6 = 18. So Bitcoin should go up 18 times to be on par with the silver market capitalization. Bitcoin would need to be $2880/Bitcoin. At this moment, Bitcoin is much too small in market capitalization to even compete against the silver market. But if Bitcoin were to go this high, then I would be worried about competition against silver.

While Bitcoin had a huge run-up, silver had a plunge in price (chart 3).

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Chart 3: Silver Price

So if you happen to own Bitcoin, switch some of it in silver as a hedge on the rise in Bitcoin.

There are many reasons to execute this trade at this moment. One reason is that the large commercials have covered a significant amount of its shorts as chart 4 suggests (purple bars go up).

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Chart 4: COT Report Silver

Another reason is that the silver premiums on junk silver for one of the biggest dealers (APMEX) were rising to 12% on 5 April 2013. This 12% premium is a historic unprecedented high in junk silver as I pointed out here. In normal times, junk silver would be at or below spot value.

Silver, at these prices, is coming close to marginal cost of production, which will be very supportive of the price of silver. I would take this opportunity to accumulate more of this precious metal.

Source: Silver: The Natural Hedge Against Bitcoin