A couple of weeks ago, my Foolish colleague Alan Oscroft asked whether recent large falls in the price of Bitcoin should be taken as a sign for investors to start buying the cryptocurrency. His conclusion? Definitely not. Not only do I agree with him but I think investors should really consider getting some exposure to a different asset.
The trouble with Bitcoin
Perhaps the biggest reason for Bitcoin’s poor performance so far in 2018 — and a reason to continue avoiding it — is the growing prospect of widespread regulation, with prominent politicians/authorities in the US, China, UK and South Korea all hinting over the last few weeks that restrictions are likely to come into force sooner rather than later. Today’s announcement from Lloyds Bank that it would ban customers from buying cryptocurrencies on their credit cards on concerns that people are running up debts from speculating is just an indication of what’s likely to happen over the next few months.
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A further weakness in owning Bitcoin revolves around security, or lack of it. Only last week, ¥58bn (the equivalent of £373m) was stolen from the Tokyo-based cryptocurrency exchange Coincheck, affecting 260,000 of its customers. Being comfortable with uncertainty is part of investing but the fact that so many digital wallets can be plundered so easily is deeply worrying. Even if you do manage to get your money out before hackers get hold of it, there’s the issue that many UK banks are wanting to distance themselves from accepting deposits from exchanges due to concerns over money-laundering.
Another reason to be wary of Bitcoin is the fact that recent falls don’t seem to be isolated. Other cryptocurrencies including Ripple, Ethereum and Litecoin have all tanked by double-digit percentages over the last couple of weeks. When the falls are so widespread, it would appear many people are exiting the market rather than moving around within it — an ominous sign.
The beauty of gold
In contrast to Bitcoin, gold is tangible, not easily stolen and far less volatile in price.
As a commodity, gold is also easy to understand. As I remarked back in December, the likelihood that the vast majority of Bitcoin holders only have a very limited knowledge of the technology involved breaks one of Warren Buffet’s key rules of investing: only buy what you understand. While blockchain technology has tremendous potential, its eventual adoption does not guarantee the existence of Bitcoin.
Given its tendency to be negatively correlated to equity markets, gold is also a great way for investors to protect themselves against a downturn in the latter. As we never tire of saying at the Fool, having a fully diversified portfolio is key to reducing the possibility of being wiped out if markets turn against you, particularly if you only have limited time to devote to following your holdings. Even in tough times, there will still be buyers of gold. Bitcoin? Who knows?
Perhaps one final advantage to the shiny stuff is that there are lots of ways of getting exposure to it, from small-cap gold miners to FTSE 100 giants to exchange traded funds that track either a group of miners (handy for reducing stock-specific risk) or the price of gold itself.
With so many advantages over the digital currency, I know where I’d put my capital right now.