The debate on whether Bitcoin is like or unlike gold has been widely discussed and seems to be an overdone narrative. However, there have been analysts who have been trying to draw similarities and differences between the two assets. While there are similarities in terms of its limited supply and as a hedge against inflation and the equity market, there are also fundamental differences between the two assets.
These differences are crucial, especially while analyzing investment behavior. In a recent paper titled Can Bitcoin Glitter More Than Gold for Investment Styles, the authors delved into three prime facets of investments for both Bitcoin and Gold such as its hedging capabilities, safe-haven narrative, and diversification role for investment portfolios.
The findings of the researchers noted that the yellow metal offered a weak safe-haven for most portfolios. This was more visible in large-cap style portfolios and cyclical industries. On the contrary, Bitcoin was also a weak safe-haven for some of the large-cap and cyclical industry portfolios, excluding the health industry where it served as strong safe-haven.
Despite being a safe-haven, Bitcoin offered minimal hedging potential for large-cap style portfolios and was more robust for non-cyclical industries. This feature of the digital asset could be due to its non-cyclical feature that separates the digital gold from actual gold. For example, the oil crash that took place in May had barely any impact on Bitcoin’s price and volatility.
Due to its ‘untethered’ nature, Bitcoin showcases more pronounced hedging potential for noncyclical industry stocks, compared to cyclical stocks, the paper found.
With regard to conditional diversification, investors will require a smaller amount to hedge downside risk using Bitcoin, in comparison to gold. However, gold offers superior hedging effectiveness, making it better than BTC, the researchers argued.
Additionally, the findings of the research suggested higher benefits of gold in a portfolio during instances of market turmoil. However, a minimal presence of Bitcoin in the industry portfolio produced the highest diversification benefit. Overall, gold seems to be a superior hedge in the U.S equity market.