jakiro
Author: Divine Grace
Digital gold stands out, while traditional gold is as stable as Mount Tai.Complementarity is the way to go.
I met a fund manager from a traditional financial institution at a blockchain summit.He said frankly: “In the past, we regarded Bitcoin as a speculative toy, but now we have to incorporate it into the asset allocation model.” Behind this change is the brutal growth and gradual institutionalization of Bitcoin over the past ten years.
At the same time, central banks around the world have continued to increase their holdings of gold over the past 14 years. In the first 11 months of 2023 alone, the cumulative increase in gold prices reached28%, is expected to record the largest annual increase in more than ten years.
Gold and Bitcoin, two seemingly parallel world assets, are jointly becoming important choices for global investors’ asset allocation.
01 The truth about market relations is neither substitution nor isolation
Bitcoin has been dubbed “digital gold” since its inception, and there are indeed similarities between the two.The core commonality is thatscarcity.Gold relies on natural scarcity and high mining costs to support its value, while Bitcoin relies onTotal supply limit of 21 million coinsand a “halving” mechanism that occurs approximately every four years to maintain scarcity.
This scarcity basis causes the two to often fluctuate in the same direction at the macro level.Market research shows that when risk assets fall, gold usually exhibits a negative correlation, while Bitcoin maintains a positive correlation with risk assets.This difference reveals their essentially different properties.
The market performance in 2023 provides a perfect example: during the U.S. banking crisis in March, gold rose as a traditional safe-haven asset, but Bitcoin also received inflows due to the “decentralization” narrative; and when inflation peaked and interest rate hikes slowed, the two rebounded together.
This “conditional complementarity” relationship allows gold and Bitcoin to play different roles in an investment portfolio.Gold is more like an experienced veteran, stable at ordinary times, but more valuable in troubled times; Bitcoin is like a talented new star, with huge fluctuations but unlimited potential.
02 The double-sided dance of volatility and risk aversion
Volatility is the most significant difference between Bitcoin and gold.Data shows that the average daily volatility of gold is approximately1.14%, while Bitcoin’s average daily volatility is as high as3.88%, which is 3.4 times that of gold.This difference in volatility is even more pronounced in extreme markets.
When the global market fell due to the epidemic panic in March 2020, Bitcoin plummeted by more than 40% from its high point and closed down 25% that month.During the same period, gold only briefly fell 8%, and then quickly rebounded to the pre-fall level, and then continued to rise due to safe-haven demand.
This difference stems from the two completely different market structures and investor bases.
The gold market has a mature system, with central banks, institutions and individual investors participating, with a daily trading volume of approximately$250 billion.Although the Bitcoin market is growing rapidly, its daily trading volume is far lower than that of gold, and the investor structure is mainly risk-averse.
Regulatory attitudes are also an important factor.Gold is strictly regulated and widely recognized globally, while the regulatory environment for Bitcoin is still evolving, and policy differences in different jurisdictions cause it to face greater uncertainty.
03 Gold/Bitcoin Allocation Strategy in a Portfolio
For rational investors, gold and Bitcoin are not an either-or relationship;How to configure reasonablyproblem.
Research shows that allocating 1% to 5% of Bitcoin in an investment portfolio can increase risk-adjusted returns.But this is primarily due to a sharp rise in Bitcoin prices rather than a reduction in volatility.To balance the risk of volatility, gold appears more reliable.
Gold mainly offers in investment portfoliosStability.When stocks fall sharply, gold tends to have a negative correlation with stocks, thus hedging portfolio risk.Bitcoin is not as good as gold in this function due to its high correlation with risky assets such as technology stocks.
The allocation ratio depends on investor risk preference:
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conservative investor: The allocation ratio of gold can be increased appropriately, while the allocation ratio of Bitcoin can be kept at a low level or not allocated at all.
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balanced investor: Gold and Bitcoin maintain a balanced allocation, such as each accounting for 3%-5%
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enterprising investor: Can increase the allocation ratio of Bitcoin and use gold as a risk hedge
This differentiated allocation allows gold and Bitcoin to complement each other in an investment portfolio, rather than simply compete.A senior alternative investment expert pointed out: “Gold and Bitcoin are not substitutes. The correlation between the two is very low, fluctuating between -0.5 and 0.5 most of the time.”
04 Future trend, digital gold or real gold?
With the development of blockchain technology and the expansion of application scenarios, the institutionalization process of Bitcoin is accelerating.Traditional financial institutions such as Singapore’s DBS Bank and Bank of New York Mellon have begun to provide Bitcoin-related services.The approval of the U.S. Bitcoin spot ETF in early 2024 will provide institutional investors with a convenient allocation channel.
Bitcoin still needs to overcome many challenges before it can truly compete with gold.Kang Qiao, senior North American market strategist at the World Gold Council, pointed out: “Gold has use cases. It is a central bank reserve recognized by the World Bank and the International Monetary Fund, while Bitcoin currently has no clearly defined use cases except for speculative investment.”
Gold is also evolving.Central banks of various countries are exploring the application of blockchain technology in the gold market to track the source of gold in the supply chain and improve post-trade settlement efficiency.This integration development trend of “digital gold” and “traditional gold” may provide investors with the best of both worlds.
Possible future scenarios are: gold continues to be thestabilizerfunction in the global financial system, with Bitcoin serving as aEmerging high-risk, high-return assets, gradually accepted by more institutional investors.Both perform their own duties in the reform of the monetary system and jointly meet the needs of different investors.
Not only have Wall Street giants begun to include Bitcoin on their balance sheets, global central banks have also continued to increase their holdings of gold over the past 14 years, represented by the central banks of China, Poland, Turkey, the Philippines and India.Analysts from Goldman Sachs, Bank of America and JPMorgan remain optimistic about gold price trends in 2025.
Investors should not view gold and Bitcoin as competitors but as tools to combat different risks.A wise strategy is to dynamically adjust the ratio between the two according to the market environment.Leverage gold to reduce overall portfolio volatility while capturing Bitcoin’s growth potential.
