Some investors have long believed that everyone should allocate part of their portfolio to gold or other commodities. Gold, so the argument goes, protects your investments from inflation and stock market slumps.

Now some are arguing about Bitcoin.

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“My personal belief in allocating Bitcoin is a logical approach and should play a role in any portfolio, just as many people believe that gold or commodities should be used as a diversifier,” said Meltem Demirors, chief strategy officer at the cryptocurrency investment firm CoinShares recently said Barron’s Streetwise podcast.

To what extent is the world’s most popular cryptocurrency similar to the world’s best-known safe-haven asset – and do investors even have to have gold in their portfolios?

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Bitcoin: a bit like gold, but with “enormous volatility”

The economic downturn triggered by the COVID-19 pandemic has rekindled fears of inflation among some investors.

Many central banks, including the US Federal Reserve and the Bank of Canada, have increased the flow of money in their countries to stimulate economic activity. The game book is similar to that of the central banks during the global financial crisis 2007/08.

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And now, as then, some fear that this type of monetary policy will ultimately boost inflation.

“The common idea is that money will go up, people will have more money and prices will go up,” says Andreas Park, associate professor of finance at the University of Toronto.

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In other words, consumers flushed with cash can end up pushing prices up and causing inflation.





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Park does not believe that fears of rampant inflation are justified. Economies like the US and Canada have not seen high inflation since the 1980s.

The annual inflation rate is currently 1.4 percent in the US and 0.7 percent in Canada, well below the two central banks’ target of around two percent.

However, investors worried about inflation often view gold as a means of hedging. While central banks can increase the flow of money, there is only a limited amount of gold available worldwide.

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“You have to take it down if you want to add it,” says Park. “It cannot be inflated.”

The same goes for Bitcoin.

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The digital token, which should be an alternative to inflationary local currencies, should have a maximum limit of 21 million coins. New coins are only created as a reward for “miners,” users who use computing power to record and validate crypto transactions.

So far, around 88 percent of bitcoins have been mined.

And as with gold, there is little use for bitcoin in the real world, Park says. You can use gold to make jewelry, electronics, or collectibles. And you can use Bitcoin to pay for some goods and services if you can find a seller willing to accept crypto. For the most part, gold and bitcoin are only worth what buyers are willing to pay for them.


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Some people also buy bitcoin, like gold, as an investment that doesn’t correlate with the performance of the stock market, says Robb Engen, financial planner and author of the popular personal finance blog Boomer and Echo.

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Gold is widely touted as a safe haven, an investment that maintains or increases in value during times of market turbulence.

Bitcoin is an “enormous volatility,” warns Park, both as an inflation hedge and as a safe investment.

While gold itself is volatile, Bitcoin’s ups and downs dwarf the price volatility of the precious metal, Park says.

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On Friday, Bitcoin was trading at around $ 32,000 ($ 40,700), more than 20 percent below the record high of $ 42,000 ($ 53,500) hit two weeks ago when cryptocurrencies caught the attention of regulators pull yourself.

Traders also blamed the sell-off for a report posted on Twitter by BitMEX Research, indicating that part of a bitcoin may have been spent twice, even if concerns were later addressed.

[1/2] There was a stale bitcoin block today at 666,833. SlushPool beat F2Pool in one race.

It seems like a small double overhead of around 0.00062063 BTC ($ 21) was noted. Http: //t.co/o8lz9xagYG pic.twitter.com/IEdPu8JEjt

– BitMEX Research (@BitMEXResearch) January 20, 2021

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The pullback still leaves the cryptocurrency around 700 percent above its 2020 low of $ 3,850 ($ 4,900) in March. The dizzying rally was driven in part by large investors, with a number of Wall Street firms taking steps in the crypto space.

For example, JP Morgan Chase created and tested its own digital token, JPM Coin, despite CEO Jamie Dimon having been a vocal critic of Bitcoin in the past. The investment banking giant now also offers banking services to two well-known crypto exchanges, Coinbase and Gemini Trust.

And PayPal announced in October that US account holders could buy, hold and sell cryptocurrency. Derivatives Market CME Group and Fidelity Investments Inc. also offer services that enable the buying and selling of crypto assets.


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Place a bet on Bitcoin

Engen sees both gold and bitcoin as speculative investments. Investing in cryptocurrency can also be a way to showcase yourself in the early stages of a technology.

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As with the pre-legalization of cannabis stocks and the dotcom boom in the late 1990s, investors can make big profits by pouring money into a new industry in their infancy, he says. But there is a risk of steep losses if the boom breaks down, he warns.

“In any case, you could use five percent of your portfolio for a bet,” says Engen. “But you have to go into it with your eyes open.”

You could lose most of your investment, he warns.

If you want to get into speculative investing, there are some clear ground rules that you must first observe and adhere to. For example, if you commit to not tying up more than five percent of your investments in volatile crypto assets, you will have to sell a majority of your holdings as they increase in value, which means they would take up a greater proportion of your portfolio, notes Narrows.

But it can be difficult to get yourself to sell investments that have seen rapid growth, he adds.

Early success with speculative assets could lead you to believe, “You are good at it,” when in fact it was just luck, he says.

– With files from Reuters

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