Last year, both gold and Bitcoin enjoyed remarkable runs. Given their characteristics, they are often compared. While gold is a natural asset that has earned its reputation as a store of value over thousands of years, Bitcoin is a technical asset that emerged from the Global Financial Crisis (GFC).
When it comes to hedging, both gold and Bitcoin should shield investors from systemic risks in financial markets and the risk of de-dollarisation. They should also hedge against “bad inflation” but not against “good inflation”. Lastly, gold is a risk-off asset and hedges against equity market risks, while Bitcoin is a risk-on asset that tends to suffer in times of equity market corrections.
Rather than trying to figure out which of the two — gold or Bitcoin — is the better hedge, we believe that investors with an affinity for holding hedges in their portfolio could consider both gold and Bitcoin.
Same, same, but different?
Gold and Bitcoin are often compared to each other and both enjoyed a remarkable run in 2024. Gold gained around a quarter in value, reaching a new record of almost US$2,800 ($3,790) per ounce. Bitcoin’s run was even more resounding. Prices more than doubled and topped the threshold of US$100,000 for the first time as the year ended.
At first sight, gold and Bitcoin could not be more different. Gold is a natural asset and has earned its reputation as a safe haven and store of value over thousands of years. It has been used as money and is even experiencing a renaissance as a sought-after central bank reserve asset.
Bitcoin, in contrast, is a technical asset that emerged at the end of the GFC, when trust in the traditional financial system was at an all-time low. While its ambition is to be a sound form of money — this is where its similarities with gold start to emerge — it has exhibited excessive volatility during most of its comparably short history.
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Investor-driven demand
There are also similarities on the demand side. Neither the demand for gold nor the demand for Bitcoin is exposed to the ups and downs of the economic cycle but rather to investors’ appetite to hold these assets in their portfolios. How they are held depends very much on investors’ safety, security and convenience preferences.
Futures: Those interested in the financial performance of gold and Bitcoin but not in the assets themselves might opt for futures, which offer very simple and liquid access to the underlying asset, potentially including leverage. Both gold and Bitcoin futures are listed on regulated traditional exchanges, with the latter being traded as so-called “perpetuals” on blockchain-based, decentralised exchanges.
Physically backed products: These products hold the actual physical unit of gold or digital Bitcoin token on behalf of investors in a segregated form, e.g., as an exchange-traded fund or a trust. The main advantages of this are the security associated with the segregation and the convenience stemming from the fact that the products can be bought and sold on regulated exchanges, providing easy access to the underlying assets. Because of this easy access, physically backed products have become a success story for gold and Bitcoin.
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Coins, bars and tokens: Another way of holding gold is, of course, in the form of coins or bars, with the Bitcoin equivalent being the token itself, which is stored in a private wallet. This wallet can be “hot”, i.e. connected to the internet, or “cold”, i.e. disconnected from the internet. Cold wallets are considered safer, as they are less prone to cyberattacks. They can be stored in one’s home. The same options also exist for gold bars and coins.
Hedging characteristics
Considering the similarities between gold and Bitcoin, investors often ponder whether both assets share similar performance and reputation as safe-haven assets.
First, both assets should serve as hedges against systemic risks in financial markets. They should be a safe haven in case of a financial system breakdown. While not tested since the GFC, gold has demonstrated this characteristic multiple times. At the same time, Bitcoin is designed to provide robust security and a high degree of decentralisation.
Second, there is a risk of de-dollarisation. It has been debated more intensively as of late, fuelled by the weaponisation of the US dollar in the context of growing geopolitical tensions and concerns about the US’s ballooning deficits and rising indebtedness. Priced against the dollar, both gold and Bitcoin can be seen as “anti-dollars”. Therefore, they should hedge against the dollar’s demise as the world’s global reserve currency. While other currencies have grown more important in terms of trade and currency reserves as of late, de-dollarisation is more the stuff of theory than reality.
Third, gold and Bitcoin could serve as hedges against inflation. Both are supply-constrained, in contrast to fiat money, which can be “printed” by central banks and is therefore in unlimited supply. That said, not all inflation is created equal. Gold and Bitcoin should hedge against “bad inflation”, which results from reckless fiscal and monetary policies, leading to a loss of trust and massive devaluation of a currency. They should not hedge against “good inflation”, which emerges from strong economies and is countered by central banks with more restrictive monetary policies.
Finally, there is a risk of economic shocks and equity market corrections. Gold typically demonstrates its safe-haven status during such shocks, holding its value or increasing it. It is very much a risk-off asset, unlike Bitcoin, which remains a risk-on asset. Bitcoin tends to move with the equity market, exposing it to material downside risks in case of a correction.
Hence, when it comes to equity market corrections, gold is a hedge, unlike Bitcoin. Nonetheless, outside of such shock periods, including a small share of Bitcoin in a well-diversified portfolio tends to add value via improved risk-adjusted returns.
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Strategic reserves: Will Bitcoin follow in gold’s footsteps?
Since Bitcoin is often linked to gold, and since the latter is an established reserve currency, the question arises whether Bitcoin could follow in gold’s footsteps. While gold’s role as a reserve asset is historic, the case is much more complex for Bitcoin and depends on countries’ economic status. Developing nations face a gamble when creating a Bitcoin reserve while taking on debt in a hard currency, risking a “toxic debt spiral” as their income comes across in a depreciating domestic currency. Nonetheless, El Salvador’s case has proven to be successful.
For developed countries such as the US, where the possibility of creating a strategic Bitcoin reserve is being explored, the first question is whether it would be held by the Federal Reserve or the Treasury. The Federal Reserve’s chair is not exactly on board, reflecting on the one hand, Bitcoin’s status as an “anti-US dollar” and, on the other, the lack of an economic need for such a reserve. However, complexities are arising for the Treasury, given the US’s already high fiscal deficit and increasing debt burden. Despite these, we would still not rule out the possibility of a strategic Bitcoin reserve being created in the US.
Conclusion: Not ‘or’, but ‘and’
Whether gold or Bitcoin is the better hedge, it is important to have a clear understanding of both assets’ hedging characteristics.
Based on the similarities between gold and Bitcoin, we have a lot of sympathy for the “digital gold” analogy. Nonetheless, investors need to be aware that, as of today, Bitcoin often behaves as a risk-on asset. It tends to suffer quite strongly when risk aversion spreads in financial markets, resulting in reduced diversification benefits. This is different for gold, which tends to keep its value during risk-off periods. Both should excel as hedges and where Bitcoin comes close to being “digital gold” is in times of systemic stress in financial markets or doubts about the stability of the domestic currency. Fortunately, it has been many years since we experienced such times in the developed economies — despite growing concerns about an increasing debt burden and recurring chatter about de-dollarisation.
Rather than trying to figure out which of the two is the better hedge, we believe that investors with an affinity for holding hedges in their portfolio could consider both assets. With Bitcoin’s volatility being, on average, around three times higher than that of gold, an investor’s ability and willingness to take risks must be assessed before making an investment.
Carsten Menke is head of next-generation research at Julius Baer and Manuel Villegas is the bank’s digital assets analyst
