Gold the champion against Bitcoin the challenger
Gold and Bitcoin could be used as part of the alternative allocation offering additional returns, diversification, and protection against traditional assets. Gold has been used for international trade from ancient Egypt around 1500 BC. The Bitcoin network was created on 3rd January 2009 when Satoshi Nakamoto mined the starting block of chain. In exhibit 1, we show the fundamental characteristics of Gold and Bitcoin and applying scores. Gold is universally accepted by a diverse range of users offering a dual role of investment and consumer use in jewelry, while Bitcoin offers decentralization.
Gold has a long and deep history with the investment community. On the other hand, Bitcoin is the “new kid on the block” for financial investments, initiated in concentrated pockets of the retail investing community. Despite the cryptocurrencies nascent profile, the ETF AUM has ballooned this year to $146bn – half of the total investments in Gold-linked ETFs globally which are at $290bn, as of 7th November 2024.
Investors can access Gold and Bitcoin directly; from buying physical Gold or mining and holding Bitcoin in a digital account. Indices on cryptocurrency offer more choices for investors. Bloomberg offers single component indices on Bitcoin {BITCOIN Index} and Ethereum {ETHEREUM Index}, as well as equal-weight {XBTXETEW Index} and market cap-weighted {XBTXETMC Index}. In 2018, Bloomberg partnered with Galaxy to offer Bloomberg Galaxy Crypto Index {BGCI Index} which tracks the performance of the largest cryptocurrencies traded in USD, and in 2021 the DeFi Index {DEFI Index} which is the modified market cap-weighted of decentralized financial services on blockchain benchmark. The Bloomberg Commodity Gold Total Return index {BCOMGCTR Index} tracks the performance of a rolling gold futures and has been live since 2006. Gold can be accessed by leveraged, inverse, roll select and forward indices.
Since their SEC approvals this year, there has been an exponential growth in the AUM in cryptocurrency ETFs. In exhibit 2, we show the AUMs in the current Top 10 ETFs tracking Gold and Bitcoin. ETFs are designed to track the price of the assets referencing indices or the token prices. The ETF investment wrapper enables a simple and liquid format to hold Gold without dealing with security, storage, and insurance. Similarly, crypto ETFs enable access without the complexity of buying the coins on exchanges.
Gold and Bitcoin land their punches
Gold, like other metals, is mined. In terms of production, it is estimated that majority of the world’s gold has already been mined but there is still scope for additional supplies to surface from nature. Bitcoin’s supply is fixed hence its availability is already pre-determined, although there are forks, such as Bitcoin Cash and Bitcoin SV. There has been an expansion in the different cryptocurrencies launched.
Bitcoin’s role as a safe haven is up for debate as it enables decentralized independence – Bitcoin is not controlled by any government, centralized authority or banks. With its safe haven label, Gold tends to shine during periods of economic turmoil and flare-ups of geopolitical tensions. Gold holds strong cultural significance in highly populated countries such as India and China. The start of the rate cutting cycle and US dollar weakening have contributed to Gold’s solid performance. Gold is denominated in US dollars hence as the dollar weakens its price goes up and vice versa. A dogged motivation for Bitcoin investment is the “fear of missing out” as the asset has experienced parabolical price action in the past.
Common factors that align both Gold and Bitcoin include a store of value case over time. Further, both assets are viewed as viable alternatives to holding USD and the fiat currencies, which is a consideration for central banks globally. More broadly, Gold and Bitcoin prices are driven by investor sentiment and appetite.
Gold and Bitcoin prices have fallen during stress periods, when investors liquidate assets and revert to holding cash. There are other influences from tangential asset classes – commodities and currencies for Gold and technology stocks for Bitcoin.
Which one is calling the shots?
For financial comparison, we look at the volatility and correlation characteristics of Gold and Bitcoin over their common live history.
From the top chart in exhibit 3, we see that Bitcoin’s 1-year volatility is around 50%, which is more than double that of Gold’s. When it comes to the 3-year rolling correlations against traditional assets, Bitcoin has experienced more stable and neutral correlations against Equities, Bonds and Commodities, whereas Gold has been positively correlated with Bonds and Commodities, neutral against Equities. Both Gold and Bitcoin show negative correlations against the USD. Interestingly, the average long-term correlation between Gold and Bitcoin has been close to zero, which makes both together additive to multi-asset portfolios.
Gold versus Bitcoin: Which one to have in your corner?
When it comes to deciding between Gold and Bitcoin in a traditional multi-asset portfolio, it is clear each asset holds its own merits, particularly when it comes to portfolio diversification. There are many common strands with Gold and Bitcoin such as portfolio diversifiers and hedging against the USD but there are many distinct differences such as their long-term volatility profiles and momentum. It was during the high inflationary period of 1970s when Gold rose to significance with investors and established its role as the safe haven asset, could it be that Bitcoin might pick-up that baton during this inflationary regime? Investor interest is surging; ETF AUM in Bitcoin has been growing at an exponential rate and is hot on the heels of Gold’s AUM. Uncorrelated assets that have had positive long-term returns, like Gold and Bitcoin, are additive to multi-asset portfolios to preserve long-term gains and dampen volatility.
Why make a split decision when both Gold and Bitcoin are knockout candidates? Think BOLD – Bitcoin AND Gold, not Bitcoin versus Gold.
