A popular debate heating up amongst investors and markets is whether cryptocurrencies like Bitcoin can rival precious metals commodities, such as Gold, as an inflation hedge and portfolio diversifier.
Typically, Bitcoin is famous for its volatility, which kept mainstream investors at bay. Last week, however, the asset saw a significant drop following its 150% run-up over the year. Therefore, with less volatility, investors of old and newer generations started venturing to this automated asset instead of the haven of Gold. Figures proved this, in that metal-backed funds dropped by approximately $5 billion, yet cryptocurrencies doubled. Therefore, many experts believe that moving gold holdings into the Bitcoin industry will significantly change diversification strategies for many.
Mitigating factors like the coronavirus pandemic, which reduced demand for havens contributed to bullion’s recent poor performance. Additionally, Bitcoin’s functionality and transparency have made the asset favorable amongst millennials and as a medium of exchange. This is because all Bitcoin transactions are viewable on the blockchain, which is readily accessible to all. Opposingly, a large part of the Gold trade takes place on over-the-counter markets in London, England. Hence less data is available as one must trust custodians to display their flows on the market. This open policy of cryptocurrencies has made them a credible store of value and increased interest, particularly during these unprecedented times of loose monetary policies.
Despite these clear upsides in an inflationary spiral situation, Bitcoin generally poses increased risks that Gold does not. Aside from being a tried-and-true asset, Gold does not risk being supplanted by another potentially central-bank backed, digital currency.
Overall, though, markets worldwide seem to be taking Bitcoin more seriously than in previous years. There is room for both Bitcoin and Gold in the marketplace, especially if inflation and extreme debt levels continue. Therefore, experts believe one can safely allocate into both assets without forgoing one over the other.