Why Bitcoin Is NOT the New Gold

For hundreds, if not thousands of years, humanity has been fascinated by gold. For almost as long the precious metal has been regarded as a safe haven investment: an instrument that stores and holds value in times of crisis. Over the past few years, bitcoin has repeatedly been touted as the new or “digital gold”. And while the two share some characteristics – finite supply, independence, durability, transferability and market-driven valuation – to name just a few, Bitcoin is (so far) lacking one key characteristic that makes gold such a popular safe haven investment.

Given its stability in times of crisis, gold is an ideal instrument to diversify a stock-heavy portfolio and to hedge against the risks associated with being heavily invested in the stock market. Bitcoin on the other hand has been extremely volatile in recent years, and, more importantly, its performance has been linked to that of stock markets. According to an analysis conducted by Alexander Kriwoluzky and Christoph Schneider at the DIW Berlin, Bitcoin has shown a high correlation with stock market returns since 2015, meaning that, unlike gold, it tends to move in the same direction as stock markets.

While gold was found to have a weak negative correlation with the S&P 500, meaning that, if anything, its price tends to go up when markets are down, Bitcoin’s price was found to be strongly correlated with stock prices. "We observe that when stock prices go up and people buy stocks, the price of Bitcoin also goes up. Conversely, when stock prices fall, the price of Bitcoin falls. Therefore, bitcoin is not a good investment if you want to diversify your portfolio," Alexander Kriwoluzky summed up the findings. Of course, Bitcoin is still relatively young and this dynamic could change, but for now gold and government bonds are both better suited to hedge against stock market risks.

Interestingly, the authors also found very little, statistically insignificant, correlation between Bitcoin and gold, suggesting that they are not used as interchangeable safe haven investments, at least not yet.