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Should Bitcoin Replace Gold in Your Portfolio?

Dec 29, 2017

Rahul Shah, Editor, Smart Contrarian

I wonder what the womenfolk on 55 Cancri e planet would be flaunting, if not their diamond-studded jewellery. Since acquiring diamonds there is as easy as picking them up off the ground, they are certainly not going to be considered prized possessions.

This planet isn't a figment of my imagination. 55 Cancri e is real and is indeed full of diamonds. In fact, as much as one-third of its total mass is made of diamonds.

With the billions of planets to choose from and all kinds of possible chemistries, I wonder which unique planet will be discovered next.

How about a gold planet...where most of the mass is pure gold? The inhabitants of the gold planet definitely won't use gold as their currency of choice.

Because a currency - a medium of exchange - must be such that it cannot be produced at will. For if supply can be increased at a moment's notice, the currency's value will erode.

If too much gold was made available, it would put downward pressure on gold prices, and people wouldn't be comfortable holding it as a store of value. So, with the gold being freely available on the glittery Planet G, its inhabitants would have to look for some other rare metal as their currency of choice.

This is not a problem on earth though. There is only a limited quantity of gold in the earth's crust, which means its supply cannot be increased at will.

Compare this with our current monetary system where central banks can create 'money' simply by printing currency on paper, and you'll realise which currency is going to retain its value better over the long term.

'You know what, Rahul... Satoshi Nakamoto made this attribute of gold an absolutely non-negotiable rule when he introduced Bitcoin in the global financial markets', Prasheel told me as we were discussing crypto currencies recently.

Prasheel is an ardent crypto follower, he has access to some of the best crypto ideas out there - so I figured I should take this dilemma to him. And he was right. Just as gold cannot be created in factories - it must be mined - Bitcoin also has to be mined, although digitally.

And linked with the mining process is the stipulation that Bitcoins will have a limited and finite supply. There are only 21 million Bitcoins that can be mined in total.

The more I listened to Prasheel, the more I was convinced that the founders of Bitcoin have tried to use gold as a template to design the Bitcoin.

Well, if the meteoric rise in the price of Bitcoin is any indication, its investors seem to be buying their story. The currency has taken off like a rocket, zooming 15x in the last one year alone. And if cryptocurrency experts are to be believed, the best may yet to come.

As far as my views are concerned, I've always recommended having 5% to 10% of one's portfolio in gold as a hedge against economic uncertainty. Mind you, this allocation is for a currency that has stood the test of time and is a proven storehouse of value.

Therefore, recommending something as new as Bitcoin that hasn't even tested a bear market yet is totally out of the question for me. No matter how convincing the whole story of Bitcoin is.

Of course, some Bitcoin can still be bought for trading, or to maybe test the waters, but making Bitcoins a meaningful portion of a long term portfolio - that is a totally a no-go idea for me.

What I am going to do instead, though, is keep picking Prasheel's brains to get more insights into the world of cryptos.

Before the equity research bug bit him, Prasheel was an online security expert.

Being a techie and an investor rolled into one makes him perfect for investing in this new technologically advanced asset. Like many others, he has taken exposure to Bitcoin - but UNLIKE others - his decision is backed by the knowledge and insights he has gathered over the years.

Prasheel attributes a lot of what he's learnt about Bitcoins to his Bitcoin guru Tama Churchouse.

Tama is a leading crypto guru who knows it all - the basics of buying, storing, moving and selling cryptos (yes, bitcoin is just one of the crypto currencies. There are others that could be the future bitcoin!).

There is no one left out there who is not at least curious about this mysterious global phenomenon. If you know me, you know that I like unraveling mysteries. Whether it's the mysteries of outer space or the mysteries of my home planet - I will keep exploring these ideas.

I will keep my eyes open for more crypto insights from Prasheel - and, as always, I will share what I learn with you...

Good investing,

Rahul Shah (Research Analyst)
Editor, Smart Contrarian

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