Should You Buy Gold or Bitcoin to Hedge Against a Stock Market Crash?

The second wave of a mutated coronavirus is leading to another stock market crash. Should you buy gold and Bitcoin as a hedge against the crash?

| More on:
New virtual money concept, Gold Bitcoins

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Are you getting enticed by rising gold and Bitcoin prices? There is no doubt the two present an opportunity to double your money. But they also hold the potential to reduce your portfolio. If you want to invest here, read about them before jumping into these highly volatile investments.

Why are gold prices rising? 

The world is grappling with the second wave of the pandemic, as the coronavirus has mutated. The mutant virus has once again put a question mark on the magnitude of its impact on the economy. Many European countries have already imposed lockdowns that could extend up to March 2021. Canada has not yet felt the mutant virus attack.

When the first wave of the pandemic struck, many nations imposed lockdowns and gave away billions of dollars in the stimulus package. The central bank is printing money that is reducing the value of the currency. When currency starts losing its value, investors look for safe-haven investments. Gold is one of the oldest safety nets.

However, in a strong economy, gold stocks lose value as currency gains value. Hence, gold is not a good investment if you are thinking from a long-term perspective. The only reason to buy gold stocks is to hedge your portfolio against a market crash. Even Warren Buffett, who despised gold, bought over US$550 million worth of Barrick Gold stocks in August but sold 40% of these stocks shortly after. The stock has fallen 27% since August, as the economy showed signs of recovery.

Why are Bitcoin prices rising? 

But what is interesting is, investors are now seeing cryptocurrency as a safe haven. Many institutional investors are buying Bitcoin. They see it as a hedge against money printing.

Going by the definition, fiat money is the currency that the government issues and is not backed by a physical commodity like gold or silver. So, they can print any amount of money, as long as they have the public’s confidence. In other words, governments are funding trillions of dollars of the stimulus package from fiat money. Billionaire investor George Soros calls the stimulus cash benefits free money and warns against the stock market bubble. In the April-September period, the stock market rallied, even when the economy collapsed, because these cash benefits increased liquidity in the economy.

Unlike government-issued currencies, only 21 million Bitcoins can ever be created. When there is a limited supply, the value of the product rises, and probably that’s the reason Bitcoin is attracting institutional investors. But cryptocurrencies are very risky. They are prone to digital scams, and there no regulations for digital currency.

Back in 2017, there was a cryptocurrency boom, and not only Bitcoin, but all related stocks, surged to unprecedented levels. But then, Bitcoin crashed 57% in fewer than 50 days. Now, Bitcoin has rallied to a new high of $30,266, and some hedge fund investors expect it to surpass $500,000.

Should you buy gold or Bitcoin?

Both gold and Bitcoin are highly volatile and governed by the market forces of global demand and supply. If you can handle volatility, you can get exposure to Bitcoin for $31 through the Bitcoin Fund. This ETF surged 52% since December 11.

But I would suggest you invest only a small portion of your portfolio in Bitcoin. For instance, if you have $5,000, invest less than 5% — say, around $200 — in Bitcoin. Secure the rest of your portfolio from another stock market crash by investing in Enbridge (TSX:ENB)(NYSE:ENB) 

Enbridge stock has a 25-year history of paying incremental dividends. The stock is currently trading at a 26% discount as the pandemic-induced travel restrictions have reduced oil demand. This has reduced the toll Enbridge collects for transmitting oil through its pipelines. But weakness in oil is partially offset by strength in natural gas.

Foolish takeaway 

A $4,800 investment in Enbridge will earn you $386 in dividend income. Even if your $200 investment in Bitcoin goes to $0, your portfolio will be $186 positive. And if Bitcoin doubles or triples, then you will earn $200-$400 over and above the dividend income. Enbridge stock will rally to the pre-pandemic level in two to three years as the economy recovers, representing a capital appreciation of $1,670.

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 Puja Tayal has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.

More on Dividend Stocks

ETF chart stocks
Dividend Stocks

3 ETFs to Buy Now and Hold for Decades

Holding reliable growth ETFs for decades is one of the most tried and tested ways of building your wealth over…

Read more »

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Housing Affordability Is Out of Reach for Many Canadians

The interest rate hikes will cool the real estate market, but the housing affordability crisis would worsen, as homeownership and…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 Oversold Great Canadian Dividend Stocks to Buy Now and Own for 20 Years

These top Canadian dividend stocks look oversold right now and continue to raise their payouts.

Read more »

Man holding magnifying glass over a document
Dividend Stocks

3 Value TSX Stocks to Eye in July 2022

Here are a few value TSX stocks to check out in July 2022. They also pay juicy, safe dividend income…

Read more »

analyze data
Dividend Stocks

2 Canadian Stocks at the Top of My Buy List

Here are two of the top Canadian stocks on my buy list, as the market uncertainty continues to plague Canadian…

Read more »

money cash dividends
Dividend Stocks

TFSA Passive Income: 2 Top TSX Dividend Stocks to Buy on the Correction

These top dividend stocks look cheap to buy right now for a TFSA focused on passive income.

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Oversold TSX Stocks to Buy in July

Invests can now find good value right now in top TSX dividend stocks.

Read more »

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

2 Great TSX Stocks to Start a TFSA Retirement Fund During a Market Correction

These top TSX dividend stocks look cheap right now to buy for a TFSA retirement portfolio focused on passive income…

Read more »