Bitcoin mania is in full force.
When I get to my desk in the morning, the first thing I do is check the latest gold news. But lately, when I google the word "gold," I mostly get Bitcoin news. In his most recent podcast, Peter Schiff even suggested CNBC should rename its network the "Crypto News Bitcoin Network."
Many analysts have suggested Bitcoin is replacing gold. In fact, an article on CoinTelegraph reported that some investors are actually dumping their yellow metal in favor of Bitcoin. During a recent interview on CNBC. RJO Futures' Phillip Streible declared that "Bitcoin has stolen a large market share of gold." There is at least some anecdotal evidence backing this up.
Larry McDonald of The Bear Traps Report explained that generally gold goes up when bond rates fall. But in recent weeks, the yields on bonds have decreased, and gold has simultaneously dropped by about 2% - an event that is quite rare. He said he thinks this breakdown in trends has something to do with Bitcoin.
And it probably does.
There is little doubt in my mind that Bitcoin is in a bubble. I'm not saying it has no value. I'm not saying it's going away. I'm not even saying it's going to lose most of its gains at some point. I'm just saying that there are an awful lot of people getting into the cryptocurrency game that know nothing about it other than they hope it will make them rich. There was even a CNBC report about people taking out mortgages to buy Bitcoin. This is undeniable bubble-behavior. And to me, that signals a great deal of risk in the market.
Peter Schiff went further, saying this is the most irrational bubble he's ever seen.
I think there is less of a legitimate case for Bitcoin than there was for any of the dot-com stocks that went to zero, or buying subprime mortgages.
But even if you're not as bearish as Peter on Bitcoin, it seems like it might be wise to pause and take a deep breath.
Like I said, a lot of people see Bitcoin as a replacement for gold. I think that's a mistake. Gold and crypto are two different things. They share some similarities, but there are some fundamental differences. Those differences make gold a less risky, more stable asset.
Simply put, even if you are bullish on Bitcoin, you should still buy gold.
The main difference is that gold is a thing. I can hold it. I can touch it. And I can use it to do things. I can put it in electronics. I can make it into jewelry. I can even use it as a filling in my tooth. Gold has value beyond its use as money.
Bitcoin isn't a thing. In our Fun on Friday column last week, we joked that you can't fill cracks in your floor with Bitcoin.
In his podcast over the weekend, Peter did a good job of explaining how the fundamental nature of gold makes it a better vehicle for savings.
When you don't use your gold - when you have some gold - and you decide not to do something with it, like make jewelry out of it, or use it in electronics, or any of the various ways gold is used, when you decide to just hold on to it in a coin or in a bar, what you are doing is you are saving your gold to be used later. Because gold is immutable, meaning that over time, it doesn't lose any of its properties. It's not like it rots, or it decays like other commodities. No matter how long - you can bury it in the ground and I could dig it up in a year or a thousand years and it's still there. It's still exactly the same as it was, and I can do everything in the future that I could have done today. In fact, one of the interesting things about gold is if even if you use it - even if you take your gold and turn it into jewelry, you can melt the jewelry down and you get your gold back. You get your bullion back. I mean, if I take gold and I use it to fill a cavity in my tooth, if you take out your tooth, if somebody dies, they could take the tooth, the gold's still there. You could put it right back in its bullion form. You really can't do that with other commodities. You use it and it's gone. Gold, you could use it, and use it again, and use it again, and use it again. So, it's ideally suited for savings.
Some people will argue that Bitcoin is the same. It's also immutable. As long as the internet exists, the code that is your Bitcoin will exist. Peter acknowledged this fact. But he added a "so what?"
It will be just as useless, just as worthless a thousand years from now as it is today. Because right now you can't do anything with your Bitcoin … Yes, it's immutable, but so what? What is the purpose? What have you achieved when you save nothing? If you save gold, then you are preserving an actual asset, and you are preserving all of the things that you can do with that asset. But when somebody is saving Bitcoin, they have preserved nothing, because there is nothing of value. There is nothing that can be done with a Bitcoin. Yes, you can give it to somebody else if they want it. But all they can do is hold on to it and give it to somebody if they want it. That is not the case with gold because gold has value unto itself. Gold has a use irrespective of its use as money. It has a use as a commodity, and it's the value as a commodity that makes it money.
You don't have to be as bearish as Peter on Bitcoin to recognize there is a great deal of risk in the crypto market. And in a world of expanding wealth, there is certainly room for more than one kind of asset. You can have both Bitcoin and gold. In fact, it might be a good idea to have both.
At SchiffGold, we recommend a diversified approach to investing in Bitcoin. Buying gold and silver is a great way to diversify your cryptocurrency portfolio. You can even buy gold and silver with Bitcoin. In the world of investing, it's never wise to put all of your eggs in one proverbial basket. Diversifying your cryptocurrency portfolio with precious metals can help mitigate some of the potential downsides and put you in an overall stronger financial position.