Many investors have called Bitcoin the digital version of gold. Obviously, we know it is in a lot of ways the digital version of cash, but the comparison to gold would potentially mean that if the stock market continues to be volatile or potentially crash, then Bitcoin would be an excellent place to be invested.
However, while someday Bitcoin may genuinely be the digital version of gold, it is not yet trading as such, I’ll explain in a moment, and therefore is not likely the best place to be parking your cash while the stock markets decide which direction it wants to go.
A simple chart of with the price of Gold and the price of Bitcoin overlaid on top of each other, clearly shows the two investments have not moved side-by-side over the past year, let alone the past month when the stock has been flipping from trading lower by 1% to trading higher by the same amount every few days. Since August 8th, 2018 Bitcoin and Gold have moved in the same direction at the same time just 51% of the time. Not really movements or assets that I would call correlated. Although, since May 8th, 2019, around the time we started seeing an uptick in volatility in the stock market, the two assets have been moving in sync 58%. Still not a sign of strong correlation, but better than before and a sign that someday, Bitcoin and Gold may move much closer together.
At this time, though there are just too many unknowns with the future of Bitcoin from both a legal standpoint and an adoption standpoint for it to trade hand-in-hand with Gold.
First and foremost, Bitcoin is illegal in a handful of countries around the world. China is the largest anti-crypto country, but the list also includes Algeria, Egypt, Morocco, Bolivia, Colombia, Ecuador, Saudi Arabia, Iran, Bangladesh, Nepal, Pakistan, Cambodia, and Indonesia.
Then once we go to the countries that haven’t formally put laws in place against using Bitcoin and other crypto-currencies, we have issues with scam and the digital assets being unregulated. The unregulated nature of cryptocurrencies is both a blessing for Bitcoin and a curse. Because Bitcoin is unregulated it doesn’t offer investors much protect against scams, robbery, or other criminal enterprises. Furthermore, because we don’t have any real laws pertaining to cryptocurrencies, winning a lawsuit or other legal battle in the court system is rather tricky at this time.
Another hurdle for Bitcoin to overcome is the negative image Bitcoin, and other cryptocurrencies have gained due to their supposed ‘untraceable’ aspects. While we all know drug kingpins around the world hold and use U.S. currency without it getting a bad name or image, Bitcoin on the other hand does. Just recently the U.S. Treasury Department sanctioned three Chinese nationals and their cryptocurrency addresses, alleging they violated money laundering and drug smuggling laws. This report specific notes bitcoin and Litecoin addresses.
Bitcoin initially gained some notoriety when it was being linked to a website called ‘Silk Road’ which was known for selling ‘black market’ merchandise. When the site was shut down, reports arose that Bitcoin was the primary form of currency being used as form of payment due to its anonymity and ease of use as an online currency.
Since the days of ‘Silk Road,’ the currency has remained dirty with the criminal aspect, and indeed recent stories such as the one with the Chinese nationals suspected of being drug kingpins don’t help the currencies image.
The ‘dirty’ image most likely doesn’t bother the average retail investor, but the larger institutional investors who really could affect the price of Bitcoin, still don’t want to be associated with an asset that is seen in a negative light.
So, before Bitcoin truly moves step-by-step with Gold, the digital currency needs to clean itself from the negative image of criminal enterprises that many investors still have with the asset, which is certainly not going to be an easy task, but something that will simply take time. The currency also needs to find some legal sanctuaries around the world. Besides Japan, most countries, including the U.S. are more or less indifferent from a legal standpoint on crypto-currencies. Bitcoin and the other crypto’s need to gain some traction on the legal side in terms of protections, (i.e., the government can’t just take the currency from you and make it worthless), and it needs to in some way become a little more regulated so scammers or hackers can’t just steal it from you and leave you no way of tracing back to them. Think about it this way, if a large hedge-fund invested $1 billion in Bitcoins and then they were stolen, with no way of tracking them down, how many other large investors do you think would want to dump millions of dollars into the asset class?
As of right now, Bitcoin is still fascinating and perhaps worth a small position in your overall portfolio, but it should not be seen as a way to hedge against a market decline the way that gold is used, because while they are similar in some aspects, they aren’t yet similar enough.
Disclosure: This contributor did not hold Bitcoin at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.