We need to have that talk.
The one about using protection…
You know what I mean, right? Protecting your portfolio from sudden bouts of volatility? Which you accomplish by diversifying your portfolio … not just among stocks but to different asset classes that are supposed to zig, when stocks zag?
Yeah. That protection.
But where in that protection do bits and bytes fit?
Today, bitcoin and other cryptocurrencies are entering the conversation as a new asset class for portfolio diversification.
Not only is institutional acceptance growing, but access to cryptocurrency is becoming easier as well. Last week even saw the first bitcoin exchange-traded fund get approved.
As crypto gains popularity in the mainstream, I’m now seeing arguments that they are the “digital era’s precious metals” … and that there’s no use for gold in your portfolio anymore.
Now call me old-fashioned, but I’m having a hard time substituting my gold allocation with bitcoin. And I have two good reasons for that…
Holding Up During a Crash?
I hold gold to dampen volatility when things get dicey in stocks. And when I look at the most recent times of market crisis, there is a clear winner.
Take the last two bear markets in stocks: the end of 2018 and the start of the pandemic in 2020.
Here’s the performance of the S&P 500 Index, gold and bitcoin in 2018’s bear market:
(Click here to view larger image.)
And again in 2020’s bear market:
(Click here to view larger image.)
As a hedge against a stock market crash, I’m sticking with gold!
Concerned About Inflation?
The other primary use case for gold in your portfolio is to protect against inflation.
During periods of rising prices that erode the value of your dollar, gold holds its value. That’s because it’s extremely tough to get more of the shiny metal out of the ground, and the supply is finite.
Some cryptocurrencies such as bitcoin offer a similar value proposition, since there is a finite supply and they become harder to mine.
But bitcoin has only been around during a period of disinflation (a slowing rate of inflation), so we don’t know yet how the crypto will hold up during a period of rising prices.
Gold and other commodities, on the other hand, are proven throughout time:
Source: Verdad
(Click here to view larger image.)
The table shows that gold bested all other asset classes with a 15.7% gain during periods of rising inflation going back to 1970.
So, in case my message today isn’t clear, here’s what I recommend:
Stick With What Works
I have nothing against bitcoin and other cryptocurrencies.
In fact, I believe their underlying blockchain echnology is set to disrupt payment companies earning abnormally large profits (here’s looking at you Visa and Mastercard).
And there are some fantastic short-term opportunities if you know how to trade them.
But when it comes to properly diversifying your portfolio, don’t be tempted to look at cryptocurrencies as the digital era’s precious metals!
Stick with your allocation to gold to guard against stock volatility and inflation. In fact, go ahead and grab exposure with the Sprott Physical Gold Trust (NYSE: PHYS).
Best regards,
Clint Lee
Research Analyst, The Bauman Letter
