Gold’s role in a portfolio differs from cryptos

NEW YORK – The rapid ascent of cryptocurrencies over the past year has drawn the attention of investors. Often, investments in cryptos are equated to investments in gold. Despite some apparent similarities, we believe that gold stands apart from cryptocurrencies, both fundamentally and practically. 

The World Gold Council analysis demonstrates that gold:

• sources of gold demand are more diverse
• supply and ownership of cryptocurrencies are more concentrated
• cryptos have mostly contributed to portfolio performance through returns but have added significant risk
• gold is a high-quality liquid asset and portfolios with cryptos may benefit from higher allocations to gold
• evolving regulatory frameworks may change the value proposition of cryptocurrencies

GOLD AND CRYPTOS ARE FUNDAMENTALLY DIFFERENT

The advent of blockchain and cryptocurrencies has catalysed innovation in the financial industry. Their proliferation and recent exponential price increase have captured investors’ imaginations. However, the recent developments in blockchain and cryptocurrencies do not imply that cryptocurrencies are a substitute for gold. 

The argument that gold and cryptocurrencies such as are similar appears to stem from perceptions of: 

• their limited supply
• their role as alternatives to fiat currencies. 

However, this comparison is simplistic and overlooks fundamental differences between gold and cryptocurrencies – not only in terms of their market dynamics but also in terms of their performance and the role they play in portfolios. 

GOLD HAS A DUAL NATURE

The sources of demand for gold are very different from those for cryptocurrencies. For more than 2,000 years, gold has served as means of exchange and been used as a store of value. Gold is owned by institutional and individual investors, as well as by central banks. 

Unlike cryptocurrencies, gold is also a consumer good.

WHAT IS BITCOIN?

Bitcoin first appeared in the literature in late 2008 – likely due to the disenchantment many market participants had with the financial system during the Global Financial Crisis – with the open-source software released in early 2009.

Bitcoin was initially viewed as a means to increase trust in transactions, reduce costs and bypass private ledgers. Since then, thousands of cryptocurrencies and, more generally, crypto assets have hit the market.

While all these can vary in many ways, they are generally built based on blockchain technology – a type of database that allows digital information to be recorded and distributed but not edited.