Despite the seeming similarity, bitcoin and gold should not be considered synonymous. In this article, I'll explain why gold is the best safe haven asset and portfolio diversifier, but bitcoin continues to shine due to its growing role in global payment networks and processing transactions.
SAFETY: THE ADVANTAGE OF GOLD
Gold has a much more reliable track record as a safe asset. As shown in the chart below, gold has typically performed positively during periods of negative stock market performance, especially during the sharpest declines. For example, when the novel coronavirus hit the market in the first quarter of 2020, gold not only retained its value, but and gained. Bitcoin moved in the same direction as the stock market fell, although its losses were less severe. During some previous market crashes, bitcoin has lost far more than broad stock market benchmarks. For example, in the fourth quarter of 2018, bitcoin lost 44.16%, in then while the overall stock market fell by 14.08%, and gold rose by 7.73%.
The Bitcoin volatility profile has some interesting characteristics. As shown in the following figure, bitcoin does not suffer from more frequent declines compared to gold; in fact, gold has suffered 18 quarterly losses in the 11-year period since September 2010 compared to 17 losses in bitcoin. However, Bitcoin's declines have been much more severe, with an average drawdown of 30.95% versus 8.63% for gold. The bitcoin correction that seems most significant to most investors began in 2017, when investors began to fear high-profile security breaches and increased government regulation. The price of bitcoin declined from a peak near $ 20,000 in December 2017 to around $ 6,000 by February 2018. Similarly, in April 2021, bitcoin hit an all-time high of $63,300, but then fell to $28,900 in June as the Chinese government continued to take action against bitcoin and other cryptocurrencies.
But despite its volatility, bitcoin tends to bounce back quickly, in part because the price has been supported by a broad rise in popularity and adoption in recent years. Even after falling 82% since July 2011, bitcoin bounced back in within 14 months. On the other hand, gold has experienced long, multi-year declines, for example, almost a 10-year period from September 2011 to July 2020, when its price fell below $ 1,800 per ounce. This highlights the different role each asset can play in a portfolio. While gold is a reliable hedge against market downturns, it is not sultimately a productive asset. As Warren Buffett said, it just lies in place. Bitcoin, on the other hand, is more prone to volatility, but at the same time, it brings much more profit.
DIVERSIFICATION VALUE: GOLD ADVANTAGE
Both bitcoin and gold have a fairly low correlation with traditional assets, but gold has the edge in terms of diversification value. As shown in the chart below, the correlation of gold with US and foreign stocks has been close to zero for the last three years, while then ;Bitcoin, this indicator is more positive. Bitcoin has also shown a positive correlation (though relatively low) with momentum stocks, highlighting its nature as a more speculative asset.
It is also worth noting that the correlation of bitcoin with the American stock market in in recent years has generally tended to grow, while the correlation of gold has actually decreased. For example, for the 36-month period ending September 30, 2021