Bitcoin, Gold, or Both?

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By Matthew Hougan

With the Fed cutting rates and China blasting stimulus, investors are looking to hedge currency risk. Should they buy bitcoin or gold?

At a conference last week, a $10 billion financial advisor asked me a simple question: bitcoin or gold?

He was worried about the long-term outlook for the dollar and wanted a hedge. But which?

With the Fed aggressively cutting rates and China pumping out economic stimulus, it’s a good question, and one many are asking right now.

I thought I’d address it head-on.

Bitcoin vs. Gold

Bitcoin and gold are similar in important ways. Principally, both are forms of money that are free from government interference. Jerome Powell can print all the dollars he wants, but he can’t create more gold or change bitcoin’s supply cap of 21 million.

But the two assets have key differences, too. Bitcoin is less established and more volatile than gold, but it’s also easier to send, store, and divide.

When you consider the role each asset can play in a portfolio, you see the same dynamic: Bitcoin and gold are similar but distinct. Both are liquid alternative assets that historically have demonstrated low correlations to stocks and bonds. Additionally, as the data below shows, adding either to a traditional portfolio has enhanced risk-adjusted returns over the past decade. (Of course, past performance is no guarantee of future results.)

The differences, however, are just as large and perhaps even more important. Understanding those differences is the key to know which to choose for your portfolio.

What Do You Want: More Return or Less Risk?

The best way to understand how bitcoin and gold differ in a portfolio is to look at what happens as you add more and more of each asset to the mix.

The table below shows the impact of adding 1.0%, 2.5%, and 5.0% bitcoin to a traditional 60/40 stock/bonds portfolio. To generate this table, I used the Bitwise Portfolio Simulator, available to financial professionals on our Expert Portal. The simulation considers all available data, starting January 1, 2014 and running through September 26, 2024 (last Thursday).

Look at the “Since Inception” column. Historically speaking, as you add more and more bitcoin, the portfolio’s total return rises dramatically. The same is true for trailing one-year and three-year returns.

Now look at the Standard Deviation column: It barely moves! According to the simulation, a 2.5% allocation to bitcoin would have boosted the portfolio’s return 50 percentage points, from 98% to 148%, while the standard deviation would have risen just 33 bps.

Contrast that with what happens when you replace bitcoin with gold.1 As the table below shows, there is almost no effect on return: Over the full 10+ years of the study, a 2.5% allocation to gold would have boosted the portfolio returns by just 1%! Where gold does have an impact, however, is on the volatility side (check the Standard Deviation column again), which falls as you add more and more gold to the mix.

Each asset tells a story of trade-offs. More returns for essentially the same risk? Look to bitcoin. Basically the same returns for less risk? Look to gold.iShares Core U.S. Aggregate Bond ETF (AGG)

Both are great outcomes, but they are critically different. Which you choose depends on your personal circumstances.

What Happens If You Do Both?

Faced with these results, a natural question to ask is: Why not invest in both? Can you get the best of both worlds?

Sadly, no. There is no free lunch here.

The table below compares three possibilities: A portfolio enhanced with 5% gold, 5% bitcoin, and a 5% split between the two (2.5% gold, 2.5% bitcoin). The split portfolio is about what you’d expect: When it comes to risk/return metrics, it basically splits the difference between the 5% gold and 5% BTC portfolios.

Probably the biggest thing this table makes clear is just how much bigger an impact bitcoin has than gold at equal allocation sizes. Look at the swing in the Sharpe ratio between the 5% GLD and 5% BTC portfolios—gold barely moves the needle, while bitcoin smashes it.

Conclusion

Given all that, what’s the answer to the advisor’s “bitcoin or gold” question?

One answer might be, “It depends on your risk tolerance, and whether or not you prefer a similar return at lower volatility or a much higher return with similar volatility.” That would be accurate and supported by the data.

But there's a different, far simpler answer I'd give if I were speaking for myself and looking at those Sharpe ratios: “Bitcoin.”

Note

(1) In our analysis, we've used the world's largest and most liquid spot gold ETF, GLD, as a proxy for the price of gold.

Risks and Important Information

No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.

Trading in crypto assets comes with significant risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks and risk of losing principal or all of your investment. In addition, crypto asset markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Crypto asset trading requires knowledge of crypto asset markets. In attempting to profit through crypto asset trading, you must compete with traders worldwide. You should have appropriate knowledge and experience before engaging in substantial crypto asset trading. Crypto asset trading can lead to large and immediate financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price.

The opinions expressed represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events, or a guarantee of future results, and are subject to further discussion, completion and amendment. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.