Bitcoin's Correlation With Gold Is Near an All-Time High. Does That Make Bitcoin a Buy?
Key Points
Bitcoin is a cryptocurrency whose value is determined by what its holders are willing to pay for it.
Gold is a physical asset that has been used for millennia as currency.
- 10 stocks we like better than Bitcoin ›
Diversification is important to consider, particularly at a time when Wall Street's leading figures are warning investors about risk. For example, Jamie Dimon, the CEO of JPMorgan Chase (NYSE: JPM), recently suggested that "risks are shifting below the surface like tectonic plates" that could "cause meaningful disruptions when they shift or collide." Investors have been bidding up the price of gold as they look for a safe-haven asset just in case there's a Wall Street earthquake on the way.
Bitcoin's (CRYPTO: BTC) correlation with gold is near all-time highs. That has some suggesting that Bitcoin could be a gold alternative. Be careful of viewing this cryptocurrency as a diversification tool on par with gold.
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Gold is a physical asset, Bitcoin isn't
The main reason investors buy gold when they are worried about the economy and stock market is that it is a physical asset with a long history as a store of wealth. It is also used in jewelry and other industrial applications due to its conductivity and malleability. But the big story is that, if the world economic order comes to an abrupt end, history suggests you can use gold as currency.
Bitcoin is a digital asset. Its value is determined by what its holders are willing to pay. It is pitched as a currency, but it's not easily used for that purpose for most consumers. It is also pitched as a store of wealth, but its history is very short, and its value has been shockingly volatile. Most notably, if the power goes out, you can't access your Bitcoin.
Owning Bitcoin is not the same thing as owning a gold coin. In other words, if you are trying to protect against the worst-case scenario, Bitcoin correlating highly with gold isn't meaningful. If you are looking for an easy way to add portfolio diversification, you may find it more compelling. However, you still have to consider the relatively short history of Bitcoin. In fact, Bitcoin didn't even come into existence until the end of the Great Recession. That means there's no history to suggest what will happen to its price during a deep, financially led economic downturn.
Is Bitcoin worth buying?
Bitcoin's increasing correlation with gold could be viewed as a positive for investors who want to use Bitcoin as a diversification tool. But the truth is, there's no material history suggesting it could replace gold on that front. Bitcoin is still very new and is probably best viewed as a speculative investment, if you consider it an investment at all. Simply put, for most investors, it looks like it is too soon to really know what Bitcoin's value is either monetarily or functionally.
Should you buy stock in Bitcoin right now?
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JPMorgan Chase is an advertising partner of Motley Fool Money. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and JPMorgan Chase. The Motley Fool has a disclosure policy.
