Should Bitcoin Take The Place Of Gold In Your Retirement Portfolio?

The issue of how to diversify your retirement portfolio is one that you need to take seriously. Once upon a time, a gold IRA was the hotcake. At present, Bitcoin is being touted to offer a safe haven. The argument is that Bitcoin is here to replace gold, as there have been a few occasions when the prices of both moved counter to each other. In here, we’ll check if you should consider choosing Bitcoin over gold in your retirement portfolio.

Relationships between gold and Bitcoin

We can safely classify the relationship between gold and Bitcoin into two categories. I call the first a sentimental relationship. This deals with the fact that the price of gold has been moving counter to the price of Bitcoin over the past few months. To solidify this relationship, as gold gradually rose to the $1,300 level, Bitcoin was crashing slowly. With this, investors are beginning to expect Bitcoin to rally if gold plunges again. However, this particular relationship between gold and Bitcoin is artificial. Investors who withdrew their capital from gold in search of another “safe haven asset” are its originator. With time, this sentiment will die down.

The second relationship between these two is economy-related. One of the reasons why people turned to precious metals like gold was to maintain financial privacy, as the government is always after taking this away from the citizens. According to financial advisor Kirk Elliott, Ph.D., “Gold frustrates the attempts of governments to completely control the finances and lives of their citizens.” In the same vein, with the availability of anonymous wallets, Bitcoin also offers financial privacy. With relationships between gold and Bitcoin already established, let’s consider the investment case for Bitcoin. (source)

Bitcoin’s Investment Case

The first and, arguably, the most attractive thing about Bitcoin is its limited supply, which it has in common with gold. The production of Bitcoins is limited to 21 million units, of which more than half have already been produced. (source)  That there is a maximum number of Bitcoins that can exist means that it can be more valuable than many currencies.  At least, there won’t be central banks to print more of it to tweak the economy. This could mean that in time when the US dollar is not doing fine, Bitcoin could help preserve the value of your savings. However, you should note that Bitcoin is just a digital currency, and not a legal tender.

Another investment case for Bitcoin is that it is a good alternative in this period of stock market uncertainties. A stock market maxim has it that, “as goes January, so goes the rest of the year.” Therefore, with the bad start that has befallen the stock market, it is possible that 2014 won’t be great for stocks. As such, investors might want to look for means to safeguard their capital. Gold’s performance over the last 12 months doesn’t make it look like a safe haven – at least for the now. This brings about the idea of investing in Bitcoin. And in truth, if the stock market struggles this year, many people might consider Bitcoin. This will lead to an increase in demand of the limited e-currency. In the end, Bitcoin could perform greatly this year. But being a Foolish reader, you have to check if Bitcoin can be relied upon over the long-term. I don’t think so.

Bitcoin cannot take the place of Gold

In the movie Head Of State, one of the guys in power said, “We’re the government – we can do anything”. One thing you need to know is that government is government – it can actually do whatever it wants and Bitcoin is no exception. Of a truth, the super-high financial privacy that comes with this e-currency would foster criminal activities. The CEO of Circle Internet Financial, Jeremy Allaire said at a senate hearing last year:

Criminals and terrorists will seek to employ digital currency if it remains unregulated, leaving Bitcoin operators to operate without stringent controls and effective systems to verify identities, monitor transactions and report suspicious activity. (source)

Therefore, with time, the government would find a way to regulate this e-currency, which would make Bitcoin no different than the dollar. When this time comes, the Fed (and other central banks) would dictate the value of Bitcoin.
However, if, in the end, governments cannot find a way to take charge of Bitcoin, they can resort to pronouncing it illegal, especially if a high amount of criminal transactions is taking place.

By contrast, gold doesn’t present this treat, since the government is able to regulate it. And with gold being a hard asset, it is still more reliable than Bitcoin.

Gold will come good on the long term

Gold has been rallying recently. Its price has risen for twelve straight days, rising above the $1,300 mark. However, we’ll have to wait until the stock market stabilizes properly before we can say it has overcome its downtrend. An expert, Jeffrey Sica, founder and CIO of Sica Wealth Management, explained to Forbes last November that gold will have a hard time gaining any traction in 2014 unless the S&P start to fall. Therefore, that this has already happened and gold has responded positively to it makes one doubt that the metal has actually recovered. (source)

However, the long-term case for gold is still very positive. First, gold has been around for so long (and used widely) that it can’t start being invaluable now. According to a King Bill’s The King Report, since gold was stopped being pegged to world currencies in 1967, gold has outperformed the Dow – an index that feature gold miners like Goldcorp (NYSE: GG), Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM – by over a 100%, source). The point is if gold has performed so well over such a long period, it can still perform really well in future.

In addition, I’d like to point out here that what makes gold valuable in the real world is its demand for jewelries and technology. As long as these demands don’t die – something that doesn’t seem possible – gold will always be valuable. You might want to say that the Fed’s balance sheet controls the price of gold, which has been the case over the last five to six years. However, the Fed hasn’t always controlled gold and it will certainly not control it forever. Some factors have controlled the price of the metal in the past, some are doing it at present (the Fed), and others will control it in future. Therefore, regardless of the factors that control gold, nothing can be taken away from the real-life value if this metal.

Bottom Line

Having established above that the long-term future of Bitcoin is uncertain and that, as such, it can’t take the place of gold, it’s advisable for retirement investors to steer clear of this digital-currency. As many analysts like to look at the matter, 2014 could actually be a Bitcoin year. However, 2014 is short-term, which is not enough for your retirement account. Even if gold still carry its poor performance from last year into this year – which is also short-term – history has proven to us that gold will come good with time. On a final note, you should always bear in mind that rally (Bitcoin) is temporary, while value (gold) is permanent.

About the author: Craig Adeyanju is passionate about writing about financial topics and investing. He has been a contributor on sites like Fool.com and SeekingAlpha.com. His goal is to provide real world retirement investing opportunities for baby boomers and early retirees. You can connect with him on Twitter and Google plus.

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing