Published 2 February, 2021; revised 5 February 2021
How gold’s role in a portfolio differs from cryptocurrencies
The rapid ascent of cryptocurrencies over the past year has drawn the attention of investors. Often, investments in cryptocurrencies1 are equated to investments in gold. Despite some apparent similarities, we believe that gold and cryptocurrencies stands apart fundamentally and practically.
Our analysis demonstrates that:
sources of gold demand are more diverse (p.3)
supply and ownership of cryptocurrencies are more concentrated (p.4)
cryptos have mostly contributed to portfolio performance through returns but have added significant risk (pp.5-6)
gold is a high-quality liquid asset and portfolios with cryptocurrencies may benefit from higher allocations to gold (pp.6-7)
evolving regulatory frameworks may change the value proposition of cryptocurrencies (p.8).
Gold and cryptocurrencies are fundamentally different
The advent of blockchain and cryptocurrencies has catalysed innovation in the financial industry. Their proliferation and recent exponential price increase have captured investors’ imaginations. However, the recent developments in blockchain and cryptocurrencies do not imply that cryptocurrencies are a substitute for gold.
- their limited supply
- their role as alternatives to fiat currencies.
However, this comparison is simplistic and overlooks fundamental differences between gold and cryptocurrencies – not only in terms of their market dynamics but also in terms of their performance and the role they play in portfolios.
Gold has a dual nature
The sources of demand for gold and cryptocurrencies are very different. For more than 2,000 years, gold has served as means of exchange and been used as a store of value.4 Gold is owned by institutional and individual investors, as well as by central banks (Figure 1).