Is Bitcoin a Better Hedge Than Gold?

The initial popularity of spot bitcoin ETFs, paired with cryptocurrency’s price hovering near record highs, raises questions about where, how and if digital currencies fit in a diversified portfolio.

While the financial planning landscape shows a range from rabid support to complete aversion for most forms of crypto, the spot bitcoin ETFs have entered the conversation as a potential replacement for gold allocations. Vaughn Kellerman, associate wealth advisor at HCM Wealth Advisors & CPAs in Cincinatti, may fall into the former category, saying that bitcoin should replace gold in any portfolio "for a number of reasons." 

“Bitcoin is trustless and permissionless, and it cannot be stopped by any one entity, and it is significantly easier to store real bitcoin and verify the amount you own,” he said. “Compare that to gold, where storing and transporting physical gold can be very cumbersome and expensive, while bitcoin can be sent anywhere in the world instantly and cannot be stopped.”

Andrew Herzog, wealth advisor at The Watchman Group financial planning firm in Plano, Texas, also sees advantages of bitcoin over gold inside a portfolio. But added that there are demographic hurdles getting in the way for some clients.

“Bitcoin could replace gold as a currency-debasement hedge, but only for millennials and Gen Z,” he said. “Baby boomers and Gen X are more skeptical of bitcoin and seem to prefer gold ETFs or physical bullion for protecting against currency debasement.”

Bitcoin vs. Gold

In terms of gold versus bitcoin inside a portfolio, Herzog said, “Bitcoin has better supply dynamics than gold, but gold has more use cases today than Bitcoin. But moving forward, I see momentum shifting to bitcoin for diversification.”

Even with the historic success of the spot bitcoin ETFs this year, financial advisors along with several large financial institutions remain generally reluctant to embrace cryptocurrency investing.

“I do not believe bitcoin is a good replacement for gold, because it will ultimately add risk to your portfolio and is not a great diversification play,” said Charles NeSmith, portfolio manager at Tobias Financial Advisors in Plantation, Florida.

“But we don't really think either is a good investment for the long term,” he added. “Neither asset produces anything. Bitcoin and gold aren't exchangeable assets mainly because bitcoin is much more volatile than gold.”

Paul Schatz, president of Heritage Capital in Woodbridge, Connecticut, doesn’t see the case for bitcoin replacing gold as a diversification tool, but he does see opportunities to ride the performance potential of bitcoin.

“When bitcoin was at $15,000 and I was pounding the table that it was a generational buying opportunity, no one seemed to have any interest,” he said. “Now that it has gone up 300% in less than 18 months, everyone seems to want to use it in a variety of portfolio strategies.”

Beyond the performance potential, Schatz is a crypto skeptic because he believes “any global government or major central bank, can attack it.”

However, he added, if he had to create a portfolio to be held for the rest of his life, “I would include both gold and bitcoin.”

“We certainly learned that bitcoin is not a hedge against inflation and it’s not a hedge against the stock market decline,” Schatz said. “But what we do know factually is that owning bitcoin correlates well with owning the NASDAQ 100 with a four-to-6 multiplier.”

Then there is Chuck Failla, chief executive officer of Sovereign Financial Group in Stamford, Connecticut, who prefers to keep both gold and bitcoin out of client portfolios.

“I do not see incorporating either into client portfolios in any meaningful way,” he said. “But I do hear a lot more talk about bitcoin as a gold substitute and while I find that very interesting, I am still not at the point where I see either as a long-term investment.”

Mark Connors, head of research at the Canadian digital asset management firm 3iQ, is like a lot of crypto enthusiasts in that he believes most of the current criticism of cryptocurrencies is short sighted.

The turning point, from his perspective, came on Jan. 11 when the spot bitcoin ETFs started trading and became “the gateway drug for the broader crypto market.”

“The ETFs are now professionally supported by some of the largest asset managers incentivized to make them grow,” Connors said. “We know that just a 3% allocation to bitcoin produces reduced volatility with added return, and the same cannot be said for gold.”

 Applying the asymmetry of a distribution, known as skewness, to measure correlation, Connors scored equities at -0.6, bonds at -0.9, gold at 1.2 and bitcoin at 1.6.

“Bitcoin introduces complimentary and additive character to a portfolio of stocks and bonds,” he said. “As a portfolio manager, that is valued because it gives rise to the holy grail of more return and less volatility.”