This article was reprinted from the Dow Jones S&P Index Index blog.
The recent enthusiasm for Bitcoin is reminiscent of the Gold Rush in the western US between 1848-1860. With fits and starts, US enthusiasm for gold exploded over this period. Gold was the most popular safe haven and store of value in the 19th century. Considered one of the least volatile commodities, gold prices during that time were surprisingly boring compared to the current, highly volatile movements of Bitcoin. Less fluid than other established value stores, Bitcoin’s recent move has been parabolic in nature, as seen in Exhibit 1.
Recently, similarities between the two assets have grown. Bitcoin and gold are considered scarce, they have the potential to be trapped outside of conventional financial markets, and they have values that cannot be inflated by the creation of cashless currency and the ruin of a currency. Market participants, including mainstream asset managers, seem to view both as attractive inflation hedges. Gold and Bitcoin are also unconnected to other popular asset classes in portfolios, which provide evidence of their diversification benefits. Despite the low correlation, one noticeable difference can be seen in the volatility of Bitcoin over the past five years. It is several times higher than other asset classes as shown in Exhibit 2, which shows the monthly annual volatility over one, three, and five year horizons.
In addition to performance, the fundamentals of Bitcoin and gold differ in terms of owning one against the other. Gold is a physical asset, while Bitcoin is a digital one. While both are rare, gold still has no ceiling to supply, while eventually only 21 million Bitcoins can be mined. Also, according to Chainalysis, 20% of current Bitcoin supply is considered unrecoverable due to lost hard drives in garbage heaps or lost passwords in the heads of early investors. On the demand side, there are many similarities between the two assets, as shown in Exhibit 3. Gold is considered a safer investment with a long history of consumption and is widely accepted by all types of participants in the market. On the other hand, concerns about Bitcoin theft were rampant a few years ago; although as Bitcoin becomes more mainstream, these concerns are fading, though the risks of lingering technology and exchange counterparties remain. The different ways to access back gold streams are conventional and easy for different types of market participants to access. Bitcoin, however, is in its infancy, but is slowly becoming easier for mainstream investors to reach.
S&P DJI plans to launch global cryptocurrency asset indices based on data obtained from Lukka, our cryptocurrency pricing provider known for its institutional-grade pricing. Reliable and easy-to-use crypto benchmarks will soon be available to promote greater transparency in this area. Lukka is a crypto software and asset data company based in New York. S&P Global participated in Lukka’s USD 15 million Series C in December 2020.
Market participants cite many reasons why they allocate a portion of their portfolio to Bitcoin. For many of those reasons, gold is already the ideal, established candidate for adoption. The S&P GSCI Gold tracks the most actively traded gold futures on the CME. Whether you’re looking for an inflation hedge, a store of value, a way to diversify, or a directional play in commodity markets, gold is the longest-running asset of price appreciation in human history.
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