Disturbing New Trend Sees Investors Replacing Gold With Bitcoin

Many investors may not realize how much risk they’re introducing into their portfolios with Bitcoin and cryptocurrency-exposed securities such as HIVE Blockchain Technologies Ltd. (TSXV:HIVE).

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It’s hard to avoid the hype surrounding Bitcoin, cryptocurrencies, and blockchain technologies. Many opportunistic folks are exacerbating the hype with the potential for initial coin offerings (ICOs) and Bitcoin futures, whose future remains in a cloud of uncertainty.

The idea of a decentralized cryptocurrency without the need for a centralized banking system is incredibly enticing to those who don’t trust the big institutions and are waiting for next doomsday. Ironically, Bitcoin may be the cause of the next stock market crash when the cryptocurrency bubble finally bursts, and its shock waves are felt across the global markets.

As a reader of financial media, you can’t avoid pieces on Bitcoin or cryptocurrencies, even if you tried! It’s everywhere, no matter where you look. It’s a temptation following do-it-yourself investors everywhere they go, and, unfortunately, many investors may not have the discipline to resist the siren song of Bitcoin.

In a recent strategist interview conducted by CNBC, many investors have been reportedly dumping gold to purchase Bitcoin. Many of these folks appear to be investors and not speculators that have gotten caught up in the hype and will have rude awakening once the Bitcoin bubble pops.

Why Bitcoin may be compelling to gold investors

Sure, Bitcoin and gold share similar properties in that they’re both scarce “assets” with a limited availability, they’re both impossible to counterfeit, and they’re completely fungible. Both “assets” are subject to price fluctuations and are easily transferable, but there’s a huge problem with an investment in Bitcoin for those looking to replace their gold holdings.

Bitcoin isn’t really a currency; it’s ridiculously volatile, and both parties partaking in a Bitcoin transaction will both take on a ridiculous amount of risk. Bitcoin isn’t an investment either; it’s a speculation whose value is subject to technical developments.

Gold is a “safe haven” that’s like an insurance policy for when the markets implode. It’s an essential part of every portfolio, but as investors replace their gold position with Bitcoin, these investors could be in for a very rude awakening.

A risk not worth taking

Many pundits have referred to Bitcoin as a bubble, a fraud, a gamble, and even a pyramid scheme. It’s been compared to the Tulip mania of the 17th century! With many analysts projecting a $0 price target, I find it really disturbing that some investors are considering replacing their gold holdings with Bitcoin.

I personally believe that Bitcoin is worth $0, and that the probability of a crash is extremely likely for 2018. Investors who have replaced their gold holdings with Bitcoin stand to take a one-two punch to the gut when the crypto bubble finally pops.

A disastrous scenario will likely play out

Not only will their Bitcoin holdings become worthless, but the shock waves sent across the markets could trigger a violent crash that could wipe out a huge chunk of value from the equity position of the portfolio.

I don’t believe stocks deserve to be impacted by a speculative bubble popping; however, it may come to that. Many stocks, like HIVE Blockchain Technologies Ltd. (TSXV:HIVE), NVIDIA Corporation (NASDAQ:NVDA), and Square Inc. (NYSE:SQ)are vulnerable to the upcoming Bitcoin bubble burst and will experience the most heat when the crypto craze finally comes to an end.

NVIDIA and Square aren’t heavily exposed to cryptocurrencies, like many other securities out there, but I’d still avoid them because they’ll be hit hard when the Bitcoin bubble bursts. After it does burst, it may be time to do some shopping for these tech titans once the crypto hype is bled out.

There are no Bitcoin investors — only speculators. If you’re a long-term investor with no intent to gamble it all away, I’d avoid Bitcoin and securities with exposure to all things cryptocurrency like the plague, since their downfall is probably on the horizon. But for now, crypto speculators are going to continue to party like it’s 1999.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool owns shares of Nvidia.

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