Gold, Bitcoin or both?

In previous articles we have talked about gold as a long-term store of value and also that gold is the only asset that has been able to protect against inflation in the past. 

I think it is now accepted by all that Gold is a safe-haven asset to have and to cherish, and the continued purchase of the precious asset par excellence by central banks means only one thing: it is an asset to have in one's portfolio to stabilise its returns, even in times of high inflation or economic contraction. 

Figure 1: Central Banks' Accumulation of Gold 

But while Gold is cleared through customs, there is still a long way to go for Bitcoin, which is a digital asset of recent introduction to the market, only 15 years old, but which has proven by its characteristics to have intrinsic value, which I have explained well in this article: https://www.linkedin.com/pulse/aspetta-vorresti-dirmi-che-il-bitcoin-ha-un-valore-daniele-bernardi-am8gf/ 

Bitcoin was designed to have very similar characteristics to Gold, but in the digital sphere, let's try to see them together: 

1) It is mined on a decreasing emission schedule up to a maximum of 21 million (gold from this point of view is mined a little at a time, but the physical limit of its existence underground is unclear) 

2) Miners are so called because they are entities that work hard (in the digital sphere) to win the competition and be rewarded with new Bitcoins, similar to Gold Miners who scour rivers or mines for gold. 

3) The cost of Bitcoin production, or mining as it may be, is proportional to the energy spent by all the miners to win the competition and write the blockchain on the blockchain, a bit like the cost of gold mining is proportional to the energy spent (machinery, men, and time) to extract and subsequently refine the gold. In both cases, the selling price must be higher than the production price to be sustainable. 

There are other characteristics, but I don't want to bore you too much with these concepts, but rather I would like to try to get across that Bitcoin has its own dignity to exist, it is scarce in the digital sphere, which in itself is already a great value, and it is traded all over the world as a hard asset, which is an asset that by definition is scarce and linked to the energy spent to produce it, so if the energy goes up in price, this effect also affects the value of Bitcoin itself. 

So, although Bitcoin is young in terms of years, the same cannot be said in terms of trading hours in the world, because being traded 24/7, it has recently surpassed in trading hours the S&P500 which was born in 1967, but only trades 8 hours a day and 5 days a week. 

There is as yet no certainty that Bitcoin will be able to tame inflation, although in addition to the characteristics described above, its rapid growth in value suggests that it definitely, even with a 'homeopathic' amount in the portfolio, has great potential to offer not only protection against inflation, but also growth in absolute value, albeit at the corresponding price of high volatility, which is necessary when high expected returns are expected. 

In fact, Bitcoin over the past 10 years has been the best investment for no less than 8 years, if we compare it to traditional asset classes 

Table 2: Annual returns of the main asset classes 

Not having Bitcoin, albeit in homeopathic doses, in your investment portfolio was a poor choice in the past, no doubt, but it doesn't mean you can't make up for it in the future. 

On the other hand, both Gold and Bitcoin have a low correlation with the main asset classes that everyone has in their portfolio, namely bonds and equity. 

Table 3: 10-Year Daily Correlation Matrix of Major Asset Classes

Few people know that Gold is an excellent hedge (protection) for the stock market. In fact, over the past 10 years, every day that the S&P500 lost, 30% of the time Gold gained more than the S&P500 left on the ground, while 23% of the time it gained but not enough to completely cover the S&P500's loss. 

Table 4: Gold as protection against stock market decline 

This makes it clear that having gold in a portfolio where there is also equities is not only recommended, but also beneficial in terms of  risk-return ratio  

Table 5: Bitcoin as a protection against falling bond markets 

Conversely, Bitcoin is a great hedge for the bond side, where every time the Global Aggregate Bond index has lost value, 47% of the time Bitcoin has gained so much that 10% of the bond component of the portfolio is enough to give perfect protection for about 50% of the time the bond market has lost. 

So to the initial question, better Gold, Bitcoin or both, the answer seems to be clear and simple: better both, definitely! 

Then in the coming days we will see how to implement this intelligently, stay tuned.