Bitcoin is the leading cryptocurrency, and it has been falling hard; be careful if you're considering buying any.
Bitcoin (BTC 0.88%) is often paired with gold as a store of wealth. There is some logic behind that view of Bitcoin, but there are also some very material problems with this cryptocurrency that you shouldn't overlook. The 45% drop in Bitcoin's price in roughly six months may not be the buying opportunity you think it is.
Bitcoin is a cryptocurrency that exists outside the typical monetary framework. That's the big selling point, since using a cryptocurrency like Bitcoin allows you to make transactions that can't easily be tracked. And, equally important, the valuation of government-backed currencies doesn't directly impact Bitcoin. The price of Bitcoin is dictated by the market. Essentially, Bitcoin's price depends on what Bitcoin traders are willing to pay for it.
Image source: Getty Images.
It is easy to see why Bitcoin is viewed as a store of wealth. However, there's a small problem because Bitcoin isn't a physical asset. Gold, the traditional hard asset considered a store of wealth, can be held and carried. Gold is also used worldwide for jewelry and industrial purposes. Being purely digital, Bitcoin doesn't offer the same value in the real world or as a store of wealth, since something as simple as a blackout could render it inaccessible to you. And its price can, and has, varied greatly based on investor sentiment.
To be fair, gold is a commodity, and its price fluctuates with investor sentiment, too. However, gold's history as an asset dates back thousands of years. It is a well-understood asset. Cryptocurrencies like Bitcoin are still relatively new to the world. It is hardly clear how they will perform over the long term.
While there has been an increasing interest among companies and countries in owning Bitcoin, the foundation remains with smaller investors. Moreover, the short history of Bitcoin shows that investors can be highly fickle. For example, Bitcoin's decline over the last six months is dramatically larger than gold's roughly 15% drop over the same span.
Over Bitcoin's brief history, it has already gone through three drawdowns of more than 60%. Notably, Bitcoin fell during the brief recession that coincided with the COVID pandemic in 2020. If you believe that cryptocurrencies are the future, Bitcoin is probably a good choice given the size of its market. However, if you are a more conservative investor, Bitcoin's massive drawdown and short history suggest that you would probably be better off elsewhere if you are looking for a store of wealth during uncertain times.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
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