Is Bitcoin a Better Disaster Hedge Than Gold?
No, we don’t think so. While bitcoin and gold share some qualities, these two assets are different and should not be viewed as interchangeable in investment portfolios. Bitcoin is much more volatile than gold and has recently been trading more like a pro-risk asset, suffering significant drawdowns during periods of market turmoil.
Bitcoin is often considered the digital equivalent of gold for several key reasons: both are scarce and fungible, both are independent of the mainstream financial system, and both are speculative assets. These shared qualities contribute to the perception that they are both stores of value that may hedge against inflation and currency debasement.
The major difference lies in their price volatility. Bitcoin’s price is five times more volatile than that of gold. Perhaps more importantly, these investments have had different return experiences during broader market drawdowns. Gold has a long history of outperformance when equities decline—during the past 15 major US equity drawdowns of at least 15%, the median gold return was 4.1%. Bitcoin’s performance during market turbulence is more questionable. In the digital currency’s 13-year history, there are only two observable S&P 500 Index downturns, which occurred in late 2018 and early 2020. In those periods, bitcoin declined 37% and 32%, respectively.
Even outside of equity market downturns, bitcoin has suffered frequent downturns relative to gold. Bitcoin has experienced 20 drawdowns of more than 30% in the past decade, while gold has experienced only one drawdown of that magnitude during the same time frame. In fact, bitcoin is currently in a major drawdown as we write. Through yesterday, bitcoin’s price has declined 17% in 2022 and nearly 45% since reaching all-time highs of $68,990 in November 2021. Gold prices have again held up better, falling just 1% on the year. Bitcoin’s poor performance during recent downturns is one indication that it is starting to trade more like a pro-risk asset. The growing link between bitcoin and equity price movements could be attributed to the rise in global risk appetite and the growing adoption of cryptocurrencies in retail and institutional portfolios.
Some market observers have pointed to last year’s large gold outflows as evidence that the metal has lost its luster relative to bitcoin. Gold-backed exchange-traded funds experienced outflows of nearly $10 billion in 2021—the largest outflow since 2013. While some investors may have rotated to bitcoin from gold, other investors may have simply been taking profits. Gold experienced strong gains in 2020, and then traded in a tight range in 2021. Given that gold tends to move inversely with real yields and expectations for higher major central bank policy rates increased during 2021, investors may have just been reallocating capital in the portfolio.
Recent drawdowns in bitcoin prices remind us that digital assets still carry plenty of speculative risk and are far from “safe-haven” status. Down the line, if bitcoin’s price volatility drops to that of gold’s, its performance turns more defensive during market declines, and the regulatory environment clears up, we could revisit this argument. However, bitcoin is one of thousands of cryptocurrencies—many of which have few proven use cases—while gold, well, is gold. We recognize that blockchain technology offers the potential for groundbreaking technological advances, and these may deserve a place in portfolios, but investors should not assume these assets will behave like gold.
Sean Duffin, Investment Director, Capital Markets Research