Bitcoin versus gold – safe haven showdown

While Bitcoin adds benefits to a diversified portfolio, it is not an equivalent investment to gold or a substitute for gold as it adds risk through increased volatility and returns comparable to high-risk equity assets.

This is according to the World Gold Council’s senior market strategists, Joseph Cavatoni and John Reade, who compared gold and Bitcoin to challenge claims that “Bitcoin is the new gold” and a substitute for the metal’s safe-haven benefits.

Global market volatility has become increasingly prevalent over the past few months, and many investors have flocked to so-called “safe haven” assets.

Safe haven assets are investments that can stabilise a portfolio when other investments experience significant downturns or increased risk. 

Gold is often touted as investors’ go-to safe-haven asset because it provides protection from inflation, diversifies portfolios, and is typically resilient to financial and economic crises.

Central banks around the world still turn to gold to provide a buffer during financial crises that could help stabilise their countries’ economies.

However, over recent years, the rise in Bitcoin’s popularity has led many investors to refer to the cryptocurrency as the “new digital gold”, as it is also seen as a safe haven asset during volatile periods.

This is because, similar to gold, Bitcoin provides a hedge against inflation and has significantly outperformed other asset classes during periods of volatility and uncertainty.

However, Cavatoni and Reade argued in a recent press release that gold and Bitcoin are fundamentally different investments with distinct characteristics and risks. 

They explained that while both have shown strong returns over the past few years, gold’s lower volatility, negative correlation with equities, and proven safe-haven status make it a more suitable choice for diversification and risk reduction in a portfolio. 

They said Bitcoin is more akin to a high-risk equity investment and may not provide the same level of protection during market downturns.

To reach this finding, Cavatoni and Reade considered three key factors when choosing a safe-haven asset: volatility, correlation, and returns on a risk-adjusted basis.

In terms of volatility, “simply put, gold and Bitcoin sit at the opposite ends of the volatility spectrum”, they said.

“Gold has long demonstrated its role as a safe haven asset, which is supported through clear use cases by central banks, long-term investment holdings and global savings, so its volatility is on the lower end of the spectrum of comparative assets,” they said. 

“Bitcoin’s strongest use case, as described by the major asset managers, is its position as an indicator of overall blockchain adoption, making its performance and volatility closer to technology stocks.”

They said that, on a five-year rolling basis, the data shows a clear picture: gold is less volatile.

This difference in volatility is shown in the graph below, courtesy of the World Gold Council.

In terms of correlation, Cavatoni and Reade considered the two assets’ correlation with other assets during market downturns and upticks.

They found that gold has a negative correlation with the S&P 500 during market downturns, while Bitcoin often moves in tandem with high-risk equities.

“The numbers demonstrate that Bitcoin and gold have different drivers, and in times of increased stress in market conditions, gold provides a unique impact on a diversified portfolio,” they said.

This is shown in the graph below, courtesy of the World Gold Council.

Cavatoni and Reade also considered diversification and found that gold can effectively diversify a portfolio, reducing risk and improving returns, whereas Bitcoin can increase risk and may not provide substantial diversification benefits.

In terms of returns on a risk-adjusted basis, they used a diversified portfolio to demonstrate gold’s performance compared to Bitcoin. 

“We’ve simulated the performance impact on this portfolio by adding an allocation ranging from 2.5% up to 10% and assessed the impact at the varying levels of allocation,” they explained. 

“It’s clear from our analysis that a gold allocation reduces volatility while providing improved returns and does so consistently even with an increased level of allocation.”  

“However, that is not the case for Bitcoin. The more you allocate, the higher the risk.”

They explained that allocating gold to a portfolio provides an increasing level of risk-adjusted return at any level of allocation. 

However, allocating bitcoin to a portfolio and holding it for the past decade – and rebalancing where required – would have increased the risk adjusted return at a certain level, in this case 2.5%. 

However, beyond that allocation level, the portfolio volatility would have been higher, drawdowns greater, and the risk-adjusted return would deteriorate.

This performance is shown in the graphs below, courtesy of the World Gold Council.

“To truly be a safe haven asset, the right kind of performance during significant market drawdowns is key,” Cavatoni and Reade said.  

“What you can find is that once established, Bitcoin has not demonstrated the same characteristics as gold at those critical moments.” 

“When you expect protection against significant market moves, Bitcoin tracked risk assets.”

They explained that the addition of gold to a portfolio provides demonstrated diversification, while Bitcoin does not offer any genuine diversification. In effect, the addition of Bitcoin is the same as increasing exposure to high-risk equities