Bitcoin and gold have several similar qualities as a store of wealth. Gold has been used as a store of wealth by civilisation for centuries because it is a tangible asset that is difficult to replicate, and there’s a limited supply of it in the world.
The same can be said for bitcoin. Granted, the cryptocurrency is not a tangible asset, but the number of bitcoins that can ever be produced is limited. What’s more, the technology that underpins it, the blockchain, makes it easy to verify the ownership of bitcoins and is being tested for use in many other industries as well.
Crypto assets are also easy to store. Unlike physical gold which requires you to either own or pay for a vault, bitcoins can be stored on a data drive no bigger than your thumbnail.
A safe haven?
The one advantage both of these stores of value have is that they are uncorrelated assets, which, in plain English means that they tend to move in a different direction to stocks and bonds. So, if there is a market meltdown, owning one of the two should help your portfolio maintain some value if the rest of the market suffers.
However, the one big difference between gold and bitcoin is the ability for these assets to be able to preserve and grow your wealth.
For hundreds of thousands of years, gold has provided a store of wealth that has grown in line with inflation. On the other hand, bitcoin is such a new asset, which is still basically in the early stages of development, we don’t have enough evidence to see if it does help preserve wealth over the long term.
In fact, based on recent volatility alone, I believe that this asset is not suitable for anyone but the most risk-tolerant investors, although over the longer term results could be different.
Indeed, as I covered last week, some analysts believe that the price of bitcoin could hit $25,000 by the end of this year, which would undoubtedly make it an attractive store of value in the near term at least.
More work to be done
Overall I believe that bitcoin is just too underdeveloped to be a replacement for gold at this point.
Gold has been key for thousands of years for the simple reason that it works. In comparison, bitcoin is still in its development and even though there has been a considerable move towards the crypto asset over the past five years, bitcoin penetration is still relatively low, and we don’t know if it or one of its competitors will be the prevailing cryptocurrency in five or 10 years time.
Put simply, it looks to me as if bitcoin is still a speculative asset and for this reason, I don’t think it is a suitable replacement for gold in your portfolio.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.