MW Gold or bitcoin? Here's the case for adding both to your portfolio in 2025.
By Myra P. Saefong and Frances Yue
'Clearly, gold and bitcoin aren't the same': analyst
Cryptocurrencies and gold have been rounding out an impressive year, with bitcoin and the precious metal both lifted to record highs. That's one of many things digital and physical assets suddenly had in common in 2024, but it's their differences that can actually help investors balance their portfolios in the year ahead.
On the surface, bitcoin can be a rival to gold because they are both alternative assets and can help reduce risk in a traditional portfolio, said Edmund Moy, senior IRA strategist for precious-metals distributor U.S. Money Reserve.
As crypto bulls have long touted bitcoin to be "digital gold," Federal Reserve Chairman Jerome Powell also recently said bitcoin is "just like gold."
But their "differences are greater than their similarities," Moy said. "Gold and bitcoin don't correlate well with each other." That may be the strongest case for investors to own both given uncertainties in the year ahead.
Still, investors looking to diversify their portfolios should remember that diversification alone doesn't eliminate risks entirely, particularly given bitcoin's volatility, Moy said.
In addition to adding potential diversification to a traditional portfolio, both assets could help hedge against dollar depreciation, according to Mark Hackett, chief of investment research at Nationwide.
"Investors concerned over equity valuations, geopolitical uncertainty, fiscal debt, and rate pressure could benefit from a position in gold," Hackett told MarketWatch. Yet with gold nearing record highs, exposure in the asset should be modest, he said.
Bitcoin, on the other hand, has posted impressive returns, but has moved largely in tandem with equity markets, especially with technology stocks, Hackett added. "Investors with a higher risk tolerance and a longer time horizon could benefit from exposure," Hackett said.
Portfolio allocation
BlackRock, which manages the iShares Bitcoin Trust ETF IBIT, said this week that an up to 2% bitcoin allocation in a traditional, multi-asset portfolio is a "reasonable range."
Thomas Martin, senior portfolio manager at Globalt Investments, said he currently holds 10% of his protocol portfolio in gold, and may consider adding exposure to bitcoin, but it would take up less than 5% of the portfolio.
He may consider holding 5% in cash in his portfolio, while the rest dedicated to stocks and bonds, with the ratio between the two varying based on different investors' risk appetite. For some aggressive strategies he manages for clients, stocks may take up to 90% of a portfolio, Martin said in a phone interview.
Gold is fairly uncorrelated to stocks, bonds and cash, and could serve at a store of value at times, he added.
Young, old assets
Gold and bitcoin have very different histories - 5,000 years for gold versus 15 years for bitcoin, and they respond differently to market conditions, said Moy, a former director of the Treasury Department's U.S. Mint.
Bitcoin's fledgling history makes it "something that should be considered," but only as a percentage of a portfolio that you are willing to have "go away and go to zero, and then you can still recover from that," Martin of Globalt Investments said.
"The trade-off is that you have a chance that you could lose 100% of your money, and there's also the chance that it could grow exponentially over the years and compound at a rate unheard of by any other financial asset, if it really does what it's supposed to do in 10 or 20 years," Martin said.
Bitcoin (BTCUSD) rose above $100,000 for the first time on Dec. 4, a milestone viewed by many market participants as a key event in the transformation of crypto into a mainstream financial asset. It hit a record high of $103,853 on Dec. 5, according to Dow Jones Market Data, and was slightly above $100,000, or up 140% on the year through Friday.
Read archived story: Here's why gold, bitcoin and stocks are all hitting new highs
Bitcoin, the largest cryptocurrency by market capitalization, received a boost from the launch of bitcoin exchange-traded funds early this year, and was lifted by enthusiasm that the regulatory environment may become more friendly under the incoming Trump administration.
Most active gold futures (GC00) (GCG25), meanwhile, have gained over 30% this year. They reached an all-time settlement high of $2,800.80 an ounce on Oct. 30, buoyed in part by de-dollarization, strong central-bank buying, and haven demand from geopolitical risks. Prices have since pulled back to $2,709.40 Thursday.
Gold futures mark 50 years of trading this month, with Dec. 31, 1974 their first day of trading at CME Group $(CME)$.
Lack of correlation
Gold prices have a very low correlation to movements in the stock market, said George Milling-Stanley, chief gold strategist at State Street Global Advisors, estimating that gold has had a 0.03% correlation with the S&P 500 SPX since 1971, which is "mathematically zero." In other words, moves by stocks have virtually no influence over price moves by gold - and vice versa.
Data analysis conducted by Dow Jones Market Data show the rolling correlation for gold and the S&P 500 index SPX since 1975 is 0.00. Zero correlation implies no linear relationship, while a perfect positive correlation would be represented by a correlation coefficient of exactly 1. Since November 2014, the correlation for bitcoin and the S&P 500 was 0.21 and for bitcoin and gold was 0.09.
Gold has historically offered a "significant degree of protection" - against sustained high inflation, potential weakness in equities and potential currency DXYdepreciation, Milling-Stanley said. Those protections offer a "very powerful message for investors" and with gold up over 30% this year, that makes the message "even more powerful."
That said, bitcoin's returns over its short lifespan can't be ignored.
"We understand why investors choose to chase returns on their investments," said Milling-Stanley. But investors should be "mindful that in the search for returns, they are also adding a significant amount of risk to their portfolios, given that bitcoin has been more volatile than gold over the past 15 years."
Read: History suggests bitcoin could hit $150,000 in 2025 - but watch for these bumps ahead
Also read: Bitcoin sits at record high - and it's less volatile. How can that be? Here's the answer.
Not quite like gold
At a recent moderated discussion at the DealBook Summit, Federal Reserve chair Powell was asked whether cryptocurrencies were a symbol of the lack of faith in the dollar and the Fed. In his reply, he said "people use bitcoin as a speculative asset." He also said "it's just like gold, only it's virtual. It's digital. People are not using it as a form of payment or a store of value. It's highly volatile."
Powell's likening of bitcoin to gold was cited by market participants as a factor in the crypto's subsequent push above $100,000.
But bitcoin is not just like gold, wrote Mike Maharrey, market analyst at MoneyMetals.com, in a recent article. Gold is not a speculative asset and it's widely viewed as a safe-haven hedge and a store of value, he said.
'Clearly bitcoin and gold aren't the same. They are different assets that can both boost a diversified portfolio.'Mike Maharrey, MoneyMetals.com
"The fact of the market is gold and bitcoin don't tend to correlate at all," said Maharrey. "Clearly, bitcoin and gold aren't the same. They are different assets that can both boost a diversified portfolio."
-Myra P. Saefong -Frances Yue
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(END) Dow Jones Newswires
December 14, 2024 07:31 ET (12:31 GMT)
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