Gold prices have soared to new heights, reaching a record $2,733 per ounce, while Bitcoin is thriving, approaching the $70,000 mark. The rally has been fueled by increased investor demand for safe-haven assets amid the Fed’s rate cuts, China’s stimulus plan, and rising geopolitical tensions in the Middle East. This has reignited the debate over which asset makes for a better investment: gold or Bitcoin.
Bitwise Asset Management, a firm specializing in crypto index funds and ETFs, views Bitcoin and gold as assets with distinct advantages. In an interview with Quartz, Matthew Hougan, Chief Investment Officer at Bitwise, explained that while Bitcoin has the potential for higher returns, gold offers greater stability. He emphasized that Bitcoin holds more advantages over gold, particularly in terms of growth potential and long-term utility.
Why do we compare Bitcoin to gold?
Bitcoin is often referred to as “digital gold” because it shares several key characteristics with the precious metal. Like gold, Bitcoin has a finite supply as only 21 million coins will ever be mined, creating a built-in scarcity that many believe will drive its value higher over time. This limited supply introduces a deflationary element, contrasting with traditional fiat currencies that can be printed at will.
Additionally, both Bitcoin and gold are decentralized assets. This means they operate independently of central banks or governmental control, making them less susceptible to policy-driven fluctuations. Investors see this as a hedge against economic instability, particularly during times of inflation or market volatility. Consequently, both assets are often viewed as safe havens, providing a store of value when traditional markets experience downturns.
What makes Bitcoin different from gold?
Despite the striking similarities between Bitcoin and gold, there are also significant differences, one of which is price volatility. Bitcoin tends to experience far more dramatic price fluctuations than gold, sometimes within a single day.
According to Hougan, the role of Bitcoin in an investment portfolio differs fundamentally from that of gold. While both assets can serve as hedges, Bitcoin’s higher volatility means it can amplify gains or losses, making it more suitable for investors willing to take on risk for potentially higher rewards. In contrast, gold’s stability offers a more conservative approach, providing steady protection against economic uncertainties.
“When you add Bitcoin to a portfolio, it boosts returns without increasing risk, and when you add gold to a portfolio, you get the same return but less risk,” he told Quartz.
Bitcoin has a significant impact on a portfolio
Hougan pointed out that, despite their similarities and differences, gold and Bitcoin do not have the same impact on an investment portfolio. He used a vivid analogy to illustrate this, comparing the two assets to ingredients in a soup. Adding gold to a portfolio, he explained, is like adding water to a soup—it doesn’t alter the flavor significantly unless a substantial amount is added. Gold’s stability and gradual influence mean it acts as a steadying force, but its effect is subtle unless it forms a large part of the investment mix.
In contrast, Hougan likened adding Bitcoin to a portfolio to adding pepper to a soup; even a small amount can make a noticeable difference. Due to its higher volatility and growth potential, Bitcoin can have a pronounced impact on portfolio performance, amplifying returns but also introducing greater risk. This analogy underscores how Bitcoin, despite its smaller allocation, can play a more dynamic and immediate role in an investor’s strategy.
Here’s why investing in Bitcoin is better than gold
In his analysis, Matthew Hougan referenced data from Bitwise that demonstrated how even a modest allocation of Bitcoin—such as 1.0%, 2.5%, or 5.0%—to a traditional 60/40 stock-and-bond portfolio could significantly enhance returns while only marginally increasing risk.
For instance, a 2.5% allocation to Bitcoin was shown to improve overall portfolio returns by as much as 50 percentage points, with only a slight uptick in volatility. This suggests that Bitcoin’s potential for high growth can meaningfully boost portfolio performance, even at low levels of exposure.
In contrast, Hougan explained that gold had a more subtle impact on returns. While it did not contribute as much to boosting gains, gold played a key role in reducing overall portfolio risk, acting as a stabilizing asset during periods of economic uncertainty. This distinction highlights the different roles these assets can play within a diversified investment strategy—Bitcoin as a high-growth, higher-risk element, and gold as a steady, risk-mitigating component.
How do Bitcoin ETFs compare to Gold ETFs?
Over the past 30 years, more than 5,000 exchange-traded funds (ETFs) have been launched across various sectors, but Bitcoin ETFs have outpaced them all, including the highly successful gold ETFs. Following SEC approval and their subsequent debut in January 2024, U.S. Bitcoin ETFs have accumulated over $21 billion in total net flows, a remarkable achievement considering the typical challenges faced by new ETFs.
By comparison, it took gold ETFs around five years to reach the same level of net inflows. Hougan agreed, stating that Bitcoin is a more effective addition to a portfolio than gold for achieving the goals most investors seek.
And what about Ether — the tech play?
This year, in addition to Bitcoin ETFs, Ether ETFs also received approval from the SEC, raising the likelihood that other crypto ETFs, such as those for XRP and Solana, could soon follow.
At the launch of Ether ETFs, Hougan predicted that these exchange-traded products would have an even greater impact on Ethereum than they did on Bitcoin. He noted that the introduction of Ether ETFs could drive up the price of Ether, potentially pushing it beyond the $5,000 mark.
He told Quartz that if Bitcoin is like digital gold, Ether is like a tech play, and it belongs in the Nasdaq 100 effectively, like Apple (AAPL), Nvidia (NVDA), Microsoft (MSFT), and others. Like these tech giants, Ether is driven by innovation and utility, given its role as the backbone of decentralized applications and smart contracts.
“If you’re a tech investor and you don’t have Ethereum, you’re missing out,” he said. “It’d be like a tech investor not owning Nvidia.”
Why is it finally the right time to think about Bitcoin?
Hougan emphasized the significance of cryptocurrencies, particularly Bitcoin, by noting the recent trends in both Bitcoin and gold prices. He pointed out that Bitcoin is approaching its all-time high, while gold has already reached its peak, signaling growing concerns among investors about the stability of traditional fiat currencies and broader economic uncertainties.
According to Hougan, this trend underscores a shift in investor sentiment: Bitcoin offers the potential for higher returns, making it an attractive option for those seeking growth, while gold remains a go-to asset for those prioritizing stability and preservation of wealth. The choice between the two ultimately comes down to an investor’s risk tolerance and financial goals. Those willing to accept higher volatility for the possibility of greater rewards may lean towards Bitcoin, while more conservative investors might prefer the steady, time-tested security of gold.
“Keep your stocks, keep your bonds, but carve out a little space for this new asset [Bitcoin] that provides unique enhancements to your portfolio and has, in our view, significant upside potential,” he added.
