Investors will get back down to business this week, following the Thanksgiving Holiday shortened trading week. Trading may begin to slow down in the coming weeks, as the holidays and year-end approach.
If you have been following the gold market in recent months, you have likely also been seeing considerable coverage of the popular cryptocurrency, Bitcoin. In fact, some analysts have even begun comparing the digital currency to gold, and some have suggested that Bitcoin and similar digital currencies are the wave of the monetary future.
With prices continuing to rise and reaching levels near $10,000, this really comes as no surprise.
Talk about putting the cart before the horse...Given the extensive coverage surrounding these products and numerous comparisons to gold and other assets, it seemingly makes sense to try to put such investments into perspective.
Start by considering this: Gold has been considered a reliable store of wealth and value not for years, decades, or even centuries, but for thousands of years. The yellow metal is recognized and valued all over the globe, and can be used as a medium of exchange anywhere on the planet.
Bitcoin and other cryptocurrencies, on the other hand, have only gotten started in the last decade and arguably still have a lot to prove. They may be vulnerable to cybercriminals, programming errors and other issues. Although some merchants have begun accepting these products as a means of payment, widespread use of digital currencies is far from a reality, and numerous challenges will stand in the way of these products becoming more mainstream.
Now, let’s talk about bubbles for a moment. A bubble, as defined by Investopedia, is “An economic cycle characterized by rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior.”
Could such a definition fit the current cryptocurrency rage? You be the judge…
Others might define a bubble as an asset that has been inflated by speculators, and has not been purchased as a store of value. How many people that buy Bitcoin or other cryptocurrencies plan to later sell at a profit? How many believe they will sell at a large profit sometime in the near future? How many plan to simply buy and hold for years or decades to come?
How about this: Can cryptocurrencies provide a hedge against inflation? How about deflation? What about declining fiat currency values? Could they be used to purchase food, water or fuel in the event of a major crises? What about a massive attack on the global internet infrastructure?
It is very likely that the Bitcoin and cryptocurrency rage could continue, until it doesn’t. The bubble will get bigger, bigger and even bigger until the day it eventually does what all bubbles do: Pops and leaves a ton of investors wondering what just happened.
You worked hard for your investment dollars, use them wisely. If you are looking to add diversity to your portfolio with an asset class that may provide a hedge against a number of geopolitical and economic issues while also having the potential for significantly higher prices, gold is an obvious choice.
If you want to speculate on rising prices in an asset class that has no significant history or inherent value, then Bitcoin may be a great bet.
You make the choice. But if you decide to speculate, make sure you do so with capital you can afford to lose.