The rise of bitcoin this year has taken all but its most ardent supporters by surprise. The virtual currency has risen by as much as 17x since the start of the year, with it passing $17,000 for the first time this week. While it could move higher in the short term, ultimately it appears to be a bubble that is ready to burst.
A lack of scalability, logistical problems and potential regulatory issues mean that the cryptocurrency may lack appeal versus other assets. For these reasons, I’d rather buy these two gold-mining shares in order to help diversify my portfolio.
The increasing price of bitcoin seems to be almost entirely due to speculation, rather than the currency’s potential for real-world usability. It lacks scalability, since the design of its system means there is a limit on the volume of transactions which can be processed. This means that it is unlikely to ever replace other forms of payment, such as traditional currencies or credit cards.
Further, there are inherent risks in using bitcoin. Issues such as technical problems which could include hard drive failures, or even a person forgetting their password could lead to the loss of bitcoins. As well as this, there is the potential for increasing regulation which could disrupt the industry in future. And with a lack of applications to compete with fiat currencies, the long-term adoption of bitcoin by consumers seems unlikely.
Of course, it could be argued that gold has limited real-world usability. It may be used for jewellery and in various industrial applications, but its price is also subject to a degree of speculation. Therefore, proponents of bitcoin may argue that the cryptocurrency could be a digital version of the precious metal.
However, gold has a long history of being a store of value. It has survived a range of political risks, economic disasters and changing technology to remain the default defensive asset for investors across the globe. Bitcoin, in contrast, is a very new asset which could easily be wiped out by technological or regulatory change in the short run. Therefore, investors who are seeking to add diversity and a defensive characteristic to their portfolio may be better served through gold, rather than bitcoin.
Of course, one way to gain access to gold and its changing valuation is through gold miners. Two gold mining companies that could offer high long-term returns are Centamin (LON:CEY) and Fresnillo (LON:FRES). The former is focused on its Sukari gold mine in Egypt, while the latter produces gold and silver from multiple locations across Mexico.
Both companies appear to offer good value for money right now. Centamin is forecast to grow its EPS by 16% next year, which puts it on a PEG ratio of 0.9. Fresnillo’s EPS growth rate for 2018 is also 16%, which gives it a PEG ratio of 1.5. Interestingly, the two companies have prospective dividend yields of 4.3% and 2% respectively for 2018, which helps to overcome gold’s major weakness of lacking income appeal.
While Bitcoin could outperform both stocks in the near term, it has the makings of a bubble that is ready to burst. In contrast, Fresnillo and Centamin could offer appealing risk/reward ratios for the long term.
For more views on Bitcoin, gold and many other pertinent areas, enter your email address below to never miss an issue of the Master Investor magazine.
* Robert Stephens owns shares of Fresnillo and Centamin.