Bitcoin Or Gold: How To Know Which Is Best For Your Portfolio

With all the uncertainty out there, it makes sense to want to seek out assets that can be considered a “store of value”. The question is: does that mean gold, or bitcoin? Let’s dive into both assets: their similarities, their differences, and how you might make a savvy choice between the two…

They’ve got some big similarities.

With governments stuck between high levels of debt and a slowing economy, the risk of seeing another revival of highly stimulative fiscal and monetary policies is rising. In some (perhaps-not-so) extreme scenarios, that could present a real threat to the value of conventional fiat currencies. Thankfully, the unique properties of both gold and bitcoin make it more likely that they’ll preserve their value in those scenarios. Here’s why:

Scarcity: Both are in finite supply. Gold can’t be artificially created (though, sure, asteroid mining may eventually become a reality), and bitcoin's capped supply of 21 million coins is built into its underlying software protocol and can’t be changed. Unlike fiat currencies – which, essentially, can be created out of thin air – gold and bitcoin won’t see the kind of drastic increases in supply that’d erode their value.

Decentralization: Bitcoin operates on a decentralized network, free from the control or manipulation of any single entity or government. While gold isn't as decentralized, its value isn't directly influenced by any specific government or central bank policy either, and that gives it some level of autonomy. That’s attractive: the more policymakers decide to step up their influence, the more likely those assets are to benefit.

Independence from the financial system: Both gold and bitcoin can be traded and stored outside the traditional banking system, granting a degree of freedom from the policies and regulations that govern fiat currencies. This independence becomes especially appealing in times of economic uncertainty or war, or when confidence in conventional financial institutions wanes – as we saw recently, when both gold and bitcoin rallied during the collapse of some regional banks.

A shared belief in value: In captivating testimony before Congress in 1912, American financier J.P. Morgan famously declared, "Gold is money. Everything else is credit." Because of its steadfast role as both a store of value and a medium of exchange, gold has long been perceived as the shield against the crumbling of traditional currencies. While bitcoin might not share the same level of stature, it's increasingly being perceived as a serious alternative. At the end of the day, having enough people believe is what matters most. And, let’s face it, what are the other alternatives?

They’ve also got big differences.

I’m sorry to break it to you, but, no, bitcoin isn’t gold for a digital age. Gold and bitcoin aren’t interchangeable. In fact, they tend to behave very differently in certain market conditions. Here are their most important contrasts:

Gold is a more reliable hedge. The yellow metal’s been a trusted global store of value for centuries, with a solid record of hedging against extreme inflationary and deflationary scenarios. Bitcoin has a shorter, less proven history. Though it’s performed well since its inception, you have to consider the favorable environment it’s grown up in – one of remarkably accommodating monetary policy (with ultra-low interest rates and bond-buying programs of unprecedented scale) and tech advancements. Its mixed performance last year during the war in Ukraine, the spike in inflation, and the market selloff show that the OG crypto might not always meet expectations.

But bitcoin could eventually become a better medium of exchange. On this front, bitcoin has the advantage over gold with its easy divisibility, transportability, and blockchain traceability. These features make it a superior payment option for cross-border transactions. Bitcoin can't be confiscated and isn't impacted by storage costs or transport challenges. Its fungibility, verifiability, and government independence may also attract a new generation of investors who see digital currencies as the future.

Gold is a defensive asset. Gold typically outperforms bitcoin during market selloffs, as it benefits from inflows as a safe-haven asset and from non-speculative demand from jewelry buyers and central banks. In contrast, bitcoin behaves more like a speculative tech stock and often suffers from investors exiting their bets during difficult times. Until bitcoin finds more real-world uses, it’s unlikely to perform well when markets are tanking. Put more simply, don’t expect bitcoin to be a “risk-off” asset.

But bitcoin could benefit more from excessive monetary policies: Because bitcoin's full value proposition (as a practical means of payment and so on) isn’t likely to be realized for a few years yet, its duration (i.e. its sensitivity to interest rates) is still much higher than that of gold. Since its ecosystem relies on fresh invested money and innovation, it’s also much more exposed to financial conditions and benefits greatly from cheap money. Sure, bitcoin is unlikely to perform well if the Federal Reserve (the Fed) has to cut interest rates to avert an economic catastrophe. But if central banks go wild with their bond-buying activity and other measures (the kind of monetary policy actions that are colloquially referred to as “printing money”), bitcoin could eventually rocket to unprecedented highs – even if it crashes first. Of course, the opposite would be true if liquidity conditions stay tighter for longer.

Gold has much lower risks. Bitcoin has lost over 80% of its value on multiple occasions and can see 20% price swings in mere days. Gold is much less volatile (about five times less) and not as prone to big declines. Plus, the odds that gold’s value might plummet to zero and stay there are much slimmer, given its myriad non-speculative uses. A bitcoin investment, meanwhile, comes with notable downside risks on several fronts: like regulation, security, technology, and competition (think: altcoins and government cryptos).

But bitcoin has a much higher potential return. As demand for a fairer, more secure, more technologically advanced system grows, bitcoin could see astounding returns. Some estimates (like Cathie Wood's $1 million price target) are so tempting that it almost feels foolish not to own at least some bitcoin. But even if bitcoin fails to reach those lofty heights, it’s still peppier than gold and more likely to outperform, in the right environment.

So which one should you go for?

If you're looking for a more reliable hedge that's likely to perform when your speculative stocks are selling off, then gold is arguably your better option. If you think we’re heading toward a period of higher interest rates, higher-than-usual inflation, and tighter financial conditions, then gold is probably what you want, even if it doesn’t shoot the lights out. And if your goal is to improve the risk-adjusted returns of your portfolio, then again, gold is likely the better choice: bitcoin’s high volatility means it’d need to achieve extremely high returns to make a positive impact there. And let’s face it, bitcoin is unlikely to be a good hedge against a crash.

All that being said, as a “new economy” digital technology, bitcoin can be a nice complement to “old economy” real asset gold. Over the short term, it may outperform gold if the economy achieves a soft-landing scenario. And over the longer term, its potential to serve as a serious alternative to fiat currencies, its unique properties, and its potential for huge returns means it probably deserves a small allocation too.

The good news is, bitcoin’s so sprightly that even investing a small amount, at the right price, could make an outsized difference to your portfolio. And this is not a zero-sum game: for me, the best solution is to own both – with a larger weight in gold and a smaller weight in bitcoin. At least, that’s what I’ve done in my portfolio.