At the time of writing this article, Bitcoin is down more than 6% as it is correcting from its highs. Despite the rise in adoption by institutional investors, Bitcoin has found sellers in the wake of negative headlines from the newly appointed US Secretary of the Treasury Janet Yellen.
As Christine Lagarde did a week earlier, the head of the European Central Bank (ECB), Janet Yellen expressed concern that cryptocurrencies are being used for money laundering. Therefore, investors fear more regulation, which justifies depreciation.
Bitcoin is viewed as an alternative digital investment by many of the market participants. Like gold, which is a physical alternative investment, investors in Bitcoin look at the potential diversification benefits it brings.
However, Bitcoin is nothing like gold. And here we explain it.
Bitcoin vs Gold, what are the differences?
Before continuing this analysis on bitcoin vs gold, it is worth remembering that the comparison made here is relative to the role of both assets in a portfolio. Therefore, we approach the issue from an investment point of view.
First, there is no precedent that guarantees that Bitcoin is able to maintain its value during any crisis. Gold, however, has proven it time and time again throughout history.
Second, the lack of regulation of cryptocurrencies. If regulators try to regulate the industry properly (for example, to alleviate the environmental disaster caused by Bitcoin mining), many miners would not be able to continue their activity at the slightest drop in price. Gold, however, does not have those problems.
Third, the volatility is too extreme for Bitcoin to be compared to gold. At the beginning of this article, the decrease of 6% in BTC on the day was recorded. At the time of writing this paragraph, the drop is already 7.57% and, probably, it will increase at the moment of finishing this content, either up or down, it does not matter. For most investment managers, this volatility, although desirable on the one hand, exerts great pressure on the downside. After all, if you have an asset, you own it with all the good and bad that it entails.
At the beginning of the trading year, Bitcoin fell 26%. With this all said, since it is an unequivocal sign that we are facing a speculative asset. Gold, on the other hand, could not fall to zero for the simple reason that it has physical properties other than those required by the investing world (that is, it has an industrial use).
Based on all of this, Bitcoin appears to be based on faith. It’s about the faith of its users that there will always be someone to buy it and also faith in the technology behind it: DLT (Distributed Ledger).
Until this changes, Bitcoin’s penetration into the investment mainstream will continue to present difficulties.