Bitcoin is down over 6% today at the time of writing this article as it corrects from the highs. Despite increased adoption from institutional investors, Bitcoin found sellers on the back of negative headlines from the newly-appointed U.S. Treasury Secretary, Janet Yellen.
Just like Christine Lagarde, the head of the European Central Bank (ECB), did a week earlier, Janet Yellen expressed her concerns that cryptocurrencies are mainly used for money laundering. As such, investors fear more regulation, and the decline is justified.
Bitcoin is viewed by many as a digital alternative investment. Just like gold, which is a physical alternative investment, Bitcoin investors look at the potential diversification benefits it brings.
However, Bitcoin is nothing like gold. And here is why.
Why Is Bitcoin Different Than Gold?
Before moving forward, it is worth mentioning that the comparison here refers to the role of the two assets in a portfolio. Therefore, we discuss the topic from an investment point of view.
First, there is no precedent for Bitcoin to guarantee that it keeps its value during multiple crises. Gold, on the other hand, has a long history of doing that.
Second, regulation lacks completely on cryptocurrencies. If regulators try to tax the industry appropriately (e.g., to cover for the environmental disaster caused by mining Bitcoin), many miners will go bust on the slightest decline in price. Gold, on the other hand, has no such issues.
Third, volatility is too extreme for Bitcoin to be compared to gold. I stated at the start of this article that Bitcoin was down 6% on the day. By the time I wrote these paragraphs, it is down 7.57%, and probably by the time I finish the article it will move another percentage, up or down, it doesn’t matter. For most investment managers, such volatility, while desirable on the upside, on the downside puts enormous pressure. After all, if you own an asset, you own it with all the good and bad things that come from it.
One day at the start of the trading year, Bitcoin dropped 26%. Enough said, as it favors mostly the get-rich-quick wannabes. Gold, on the other hand, cannot drop to zero for the simple reason that it has physical properties outside of those required in the investment world (i.e., industrial use).
Based on all the above, Bitcoin appears to be based on faith. Faith from its users that there will always be someone else buying it and also faith in the technology that backs it up – the DLT – Distributed Ledger Technology.
Until that changes, Bitcoin’s penetration in mainstream investment will still have a hard time.