Category: General

Why Bitcoin Is Not a Replacement for Gold

Keith Fitz-Gerald, Chief Investment Strategist, Money Map Press

One of the most frequently asked questions I'm getting at the moment is whether Bitcoin is a viable replacement for gold.

No, it's not. Not in a million years.

But it may make a great compliment.

I'm well aware that Bitcoin has run from $16.80 little more than a year ago to an all-time high of $1,242.00 last November, but that's not reason enough to switch horses. At least not for me, anyway.

My concern is that there isn't enough information yet to know whether Bitcoin will survive.

For one thing, it's got a lot of competition. New "currencies" are being created almost daily. There's Litecoin, Peercoin, Namecoin, and Primecoin just to name a few. I doubt very seriously there's enough liquidity to support 'em all.

This reminds me of a period in our own history, prior to the Fed, when there were more than 30,000 currencies right here in the United States. In 1836, for example, absent any centralized regulation, more than 1,600 state, local, and private banks created their own kinds of "money." So did towns, drugstores, and even private citizens, to some degree.

Clinically speaking, the risk is that Bitcoin may be just the first of many new currencies that will come and go.

I'm not saying it's doomed, but I do wonder about its long-term staying power.

Think about it.

Bitcoin was created by an anonymous programmer, relies on code that can be hacked, has already been used in money-laundering, for the sale of drugs, prostitution, and may have even been used to pay for more than one murder behind the scenes at Silk Road (before that marketplace was shut down last year). That people who distrust central authorities would place their trust in Bitcoin against this backdrop boggles my mind.

So why's it so popular right now? I believe that people are confusing the "freedom" of the Internet with their own perception of financial "freedom" when it comes to Bitcoin – or any other cryptocurrency for that matter.

To its credit, I know that Bitcoin has been used to purchase at least one Lamborghini, that its transaction volume is now greater than Western Union's and approaching PayPal's, and that Bitpay is reportedly adding 1,000 merchants a day to its roster. It's clear there's increasing acceptance of the currency.

I am also aware that Wells Fargo and other big banks are exploring Bitcoin, just as I know that the Sacramento Kings became the first professional sports franchise to accept the fledgling cryptocurrency to pay for tickets and merchandise.

There's clearly money to be made here. Otherwise, these big players wouldn't be interested.

But are you really ready to switch horses based on what could be? I'm not.

As an investor, I want to stick with what is... especially if we are talking about something as important as a currency alternative, something that has to be both a store of value, and a crisis hedge to boot.

Love it or hate it, gold has been the de facto hard currency of choice for thousands of years. There is a quantifiable financial relationship that can be used in modern financial planning for optimum returns. In fact, gold's long history as a store of value and a crisis hedge is why I just recommend all members of The Money Map Report have gold in their portfolios – especially heading into 2014. It's trading at exceptionally low levels, but price is almost irrelevant now.

Now, I have no doubt the genie is out of the proverbial bottle when it comes to cryptocurrency. If not Bitcoin, some similar product will stick around long enough to develop a history that can be used to determine its place in a portfolio.

To me, the debate – if you can call it that – over Bitcoin and gold really centers on fundamentals.

China continues to accumulate gold and may even buy 2,600 tons – more than the entire global production annually. Other governments are also net buyers right now, too. Simple supply and demand suggests that higher prices are ahead.

The money-printing we've seen in the past five years is without precedent. Under the circumstances, gold is a logical insurance policy against devaluation – one that's just as valid today as it was in Roman times. Perhaps more so, with trillions of dollars that are backed by nothing more than political vaporware.

Further, like it or not, a global currency backed at least in part by hard assets is a logical outcome once central bankers realize the error of their ways.

My guess is that the Chinese are going to fire the first shot in 2015, when the yuan becomes freely traded out of London, and they've already accumulated the lion's share of gold that will be used to back it.

No, at best, Bitcoin is a speculative adjunct that may be great for trading if you're nimble and have above-average risk discipline. Gold, on the other hand, should be a permanent addition to your portfolio.

Invest accordingly.

[You're Invited! Keith just released his 2014 Market Forecast: The Best Way to Become Wealthy within One Year. It's a 60-minute video webinar, and it's absolutely free for ASI readers. Click here to get his predictions and recommendations on gold, currencies, bonds, banks, small-cap stocks, the three smartest "shorts," the three worst investment choices for the year, and everything else you need to know for the next 12 months.]

 

Keith Fitz-Gerald is Chief Investment Strategist for Money Map Press and Chairman of the Fitz-Gerald Group. A seasoned market analyst with 33 years of experience, he is a regular fixture at prestigious investment conferences around the world, as well as financial TV and radio programs on Fox Business, Bloomberg, CNBC Asia, and BNN. He shares specific investment recommendations with subscribers of his Money Map Report newsletter. They have consistently scored double- and triple-digit gains in the most difficult markets to navigate in history.