Gold is a metal that has long been used as currency. At one point, paper currency was backed by a gold reserve. That's no longer the case, but gold is still seen as a store of wealth because it is a physical asset. In the digital world, things are different. Investors have taken to cryptocurrency Bitcoin (BTC +1.54%) as a store of wealth. Is that a good idea in light of recent divergent price moves in gold and Bitcoin?
Gold is rising and volatile
Geopolitical and economic concerns have investors on edge. Sure, the S&P 500 is trading near all-time highs, but that hasn't stopped Wall Street from buying gold as a hedge against a market or economic crash. To be fair, gold has risen dramatically over the past year, though sometimes in a volatile fashion. As a commodity, gold is prone to material price swings. Given the emotionally driven price advance, the swing can be pretty large even on a day-to-day basis.
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Still, gold is a physical asset. If you buy a gold coin, it will still be a gold coin 100 years from now. That means you can use it to buy things in a worst-case scenario, no matter what happens on Wall Street or Main Street.
The problem with Bitcoin
Bitcoin is a digital asset. The only value it has is the value that other owners of the asset assign to it. Like gold, Bitcoin is highly volatile. Also like gold, investors view it as a store of wealth because it exists outside government control. Unlike gold, however, Bitcoin isn't a physical asset. That limits its use in the worst scenarios, like a total economic collapse.
CRYPTO: BTC
Key Data Points
Such a dire outcome is unlikely. However, there's still a good reason to question Bitcoin's value as a store of wealth. This is evident in Bitcoin's price not always moving in the same direction as gold's. From a historical perspective, gold's role as a diversification tool and store of wealth is well established. Bitcoin has been around for a few years, but compared to gold, it is still a brand-new asset class. It's largely untested as a store of wealth.
Until Bitcoin has been through a deep bear market or recession, there's no way to know whether it will be a store of wealth like gold has historically been. Only the most aggressive investors should own Bitcoin, thinking that it is a store of wealth like gold.
Of course, it's also true that only the most aggressive investors should allocate more than a small portion of their assets to gold. Speculating on gold or Bitcoin price moves isn't for the faint of heart.
