There’s been much debate about whether gold or Bitcoin (CCC:BTC-USD) is the better investment, but one firm argues that it should not be a question of which one. Wilshire Phoenix instead advises investors to include both Bitcoin and gold in their portfolio, although there have been signs that Bitcoin has been eating into demand for gold in recent months.
The firm recently launched a physical gold exchange-traded fund and has applied with the Securities and Exchange Commission to launch a Bitcoin product.
Gold Versus Bitcoin
Wilshire Phoenix co-founder Will Cai noted that Bitcoin and gold do share some similarities. In an email interview, he pointed out several reasons that investors should include gold in their portfolios.
“Gold is a special type of commodity as its price isn’t strongly determined by a producer/consumer relationship, typical of most other commodities (e.g., energy and agricultural products, industrial metals, etc.),” he said. “Gold’s scarcity and ease of storage make it a great store of value. Historically, gold has established itself as a medium of exchange as/like money.”
Cai noted that U.S. regulators have also defined Bitcoin as a commodity due to its function as a virtual currency and that both Bitcoin and gold are a “store of value and medium of exchange.” However, he argues that both asset types complement each other in an investor’s portfolio.
“To an investor, the most important aspect of gold and Bitcoin are their shared investment properties as diversifiers and hedgers within a portfolio of assets,” he said. “Both gold and Bitcoin have low correlations to other asset classes, thus can reduce a portfolio’s risk-to-return profile. Both are global assets priced in dollars, thus can be considered hedges to inflation.”
Why Bitcoin and Gold are Complements
Bitcoin’s similarities with gold make it easy for investors who already hold the yellow metal to start investing in the cryptocurrency because they already understand some of what it offers as an asset class.
“Too much discussion has centered on Bitcoin versus gold, but because of their shared properties, an investor should examine how Bitcoin can work alongside gold,” Cai said. “Even though Bitcoin is based on new technology, a gold investor will already be familiar with many of Bitcoin’s properties and can benefit from its potential upside. Similarly, for a Bitcoin investor, gold’s long proven history as a diversifier and hedger can also be useful.”
Interestingly, gold and Bitcoin are different enough that they provide diversification even from each other.
“Even with gold and Bitcoin’s shared properties, they have so far exhibited low price correlation,” Cai said. “This means that adding either to a portfolio of assets that currently includes the other would likely improve the portfolio’s risk-to-return profile.”
Will Bitcoin Replace Gold?
Many people refer to Bitcoin as “digital gold” because of its similarities to the yellow metal. However, Cai doesn’t believe Bitcoin will replace gold or that the cryptocurrency is better than the metal.
“All assets compete for investors’ dollars,” he explained. “Because of the shared properties between gold and Bitcoin, portfolio allocations can shift. But it is wrong to imply a zero-sum game where Bitcoin replaces gold. Gold’s demand and pricing are still based on macro fundamental drivers like real yield, inflation expectation, FX and not based on the price or demand of Bitcoin.”
Anthony Scaramucci of Skybridge Capital disagrees with Cai. He does think Bitcoin will replace gold one day. Scaramucci told CNBC last week that investors should accept Bitcoin’s volatility and trajectory as the cryptocurrency becomes more widely adopted.
The Bitcoin price remains volatile. It reached a record high above $63,000 in April but has since tumbled and failed to recover so far. Despite the pullback, Bitcoin is up by more than 10% year to date. Meanwhile, the gold price has been on a tear as well in recent weeks, rising back above $1,800 an ounce.
Store of Value Amid Inflation
Fiat currency alternatives like Bitcoin and gold are sure to remain important in the near term amid soaring inflation expectations. The Federal Reserve has thus far ignored inflation, saying that it will only be temporary.
However, billionaire hedge fund manager Paul Tudor Jones told CNBC that investors should “go all in on the inflation trades” if the Federal Reserve continues to ignore signs of hot inflation. He seems to agree with Cai, as he said that he would buy both gold and cryptocurrencies, in addition to commodities.
Jones came around to the idea of owning cryptocurrency last year and continues to be bullish on Bitcoin. He described it as a “portfolio diversifier” and a “story of wealth.” He also said that he has gotten nervous about valuations in the stock market compared to the overall economy.
Jones said that on Monday, he wanted 5% of his portfolio in gold, 5% in Bitcoin, 5% in cash and 5% in commodities. However, before deciding what to do with the rest of the portfolio, he wanted to wait and see what the Fed said during its two-day policy meeting.
What About When the Fed Tapers?
Jones warned about a taper tantrum if the Fed decided to adjust its policy, so some investors may wonder what will happen to gold and Bitcoin if the Fed starts to taper its bond-buying program. However, Troy Gayeski of Skybridge Capital told Bloomberg that he expects gold and Bitcoin to remain resilient even after the central bank starts tapering. He sees more upside in cryptocurrencies, which is why he’s sticking with them over gold.
It certainly seems unlikely that Bitcoin will replace gold because both serve as stores of value. For all their similarities, the fact that they display very little correlation means they both could make good additions to an investor’s portfolio.
Inflation has spooked many investors into Bitcoin and gold. Both should continue to serve as a hedge of protection against it, even after the Fed starts to taper its quantitative easing program. Inflation has been shown to be good for gold in the past, and due to its similar properties, Bitcoin should respond positively to inflation as well.
On the date of publication, Michelle Jones did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.