In 2018 many mainstream investors are seriously considering buying bitcoin and other digital currencies. Some of these investors are even thinking about selling gold or silver to move their wealth into Bitcoin. So let’s take a deep look into the difference of buying physical precious metals versus speculating on digital currencies like Bitcoin, Ethereum and Litecoin.
Beside the history of the asset classes, 5000 plus years for gold versus 10 years for digital currencies, the clear difference is that bitcoin has zero intrinsic value. Its value is derived solely from the value investors place on it. If investors lost confidence in its ability to continue to increase it could becomes worthless, however unlikely that is. In this regard Bitcoin is more like government currencies, it could collapse or drop dramatically. Gold has never been worth $0.
Well OK, But Everybody Likes Profit.
Where Bitcoin and other digital currencies shine is in their fixed supply. Bitcoin like gold and silver is mined, although the process is very different. Unlike gold and other metals mining operations the Bitcoin mining supply is fixed at a maximum of 21 million coins. This supply can never increase unless the community changes the rules, which is not as easy as it sounds.
The skyrocketing Bitcoin also has more profit momentum than gold and silver where prices have been flat for 5 years. So based on pure growth performance Bitcoin has crushed gold and silver, the dollar and your stock investments too. But as we say in the investment field “past performance is never proof of future profit”.
One of the first rules of investing is the risk reward ratio which states the risk of an investment increases with the potential profit. This should be concerning for investors looking for capital preservation because Bitcoin is up more than 10,000 percent in five years.
Bitcoin is digital and like all things digital it could be hacked. The bitcoin blockchain has had several vulnerable patches fixed already. Gold is much less likely to be taken from the gun safe in your home.
Big Brother Has Not Had the Final Word Yet.
Don’t believe any government’s digital currency policy is fixed. China has already blocked Bitcoin and other countries with weak currencies may be forced to do so for the sake of self preservation. Governments can not survive without the dilution of your wealth. They gain by adding to their own money supplies. This makes it very unlikely that they will allow digital currencies to take over.
What it comes down to is Bitcoin and other new digital currencies are still highly speculative and you should only invest with funds that you could afford to lose. At this point it‘s not an asset that you take your whole retirement account and roll the dice with. It’s also not a traditional hedge like gold and silver that offer balance to your wealth should the stock market tank. But I do recommend you buy a few Bitcoins, if only so you don’t feel so bad if it keeps rising.