The pandemic and central banks’ unconstrained money printing has resurrected well-aired concerns about the valuation of fiat money over the long run. Advocates of Bitcoin argue it is the millennial generation’s equivalent of—or competitor to—gold. Like gold, it is border-less, it has no central control over supply, is recognized globally, its supply is limited, and it offers no yield. Furthermore, its low relative storage costs, nearly infinite divisibility, and ease of transport are highlighted as being better than gold.
However, we believe Bitcoin needs to meet three characteristics before it can be considered a robust store of value: liquidity, universal acceptance, and essential real-world application. Currently, it doesn't fully possess any of these attributes. Also, the two assets behave differently in a portfolio context—i.e., they have different volatility profiles and are broadly uncorrelated.
Between 2016 and 2021, adding Bitcoin to a portfolio provided higher returns but much greater volatility, which does not suit all investors. Moreover, our calculations show that adding Bitcoin to a portfolio doesn’t provide any diversification benefits. So, in our view, Bitcoin is not a better store of value or hedge than gold.
Adding gold, by contrast, lowered volatility, and improved risk-adjusted returns for a balanced equity portfolio. To answer whether crypto assets are a store of value, we believe they first need to meet the three characteristics to become a reliable store of value. Determining this requires further observation—and cryptos may succeed (or fail) in the end. And when comparing the two, it’s also important to acknowledge the regulatory risks facing Bitcoin and other cryptos (while gold faces no such overhang).
Main contributors - Wayne Gordon, Dominic Schnider, Giovanni Staunovo
Content is a product of the Chief Investment Office (CIO).
Read full report - Bitcoin isn't gold, 22 September 2021.