Both gold and Bitcoin rose in the opening three months of 2023 when investors were spooked by bank collapses but the jury is still out on whether cryptocurrencies are reliable portfolio hedges. 
Gold is seen as a classic ‘safe haven’, tending to rise during times of market stress while keeping up with inflation over the long run. This has led many cautious investors to maintain an allocation to the yellow metal within their portfolios.
Cryptocurrencies such as Bitcoin, meanwhile, are a much younger asset class and have had a more volatile track record. However, cryptocurrencies’ decentralised nature and limited supply has led many to see the asset class as another hedge against choppy markets and inflation.
Both gold and cryptocurrencies have outperformed global equities since the start of the year: gold is up close to 6.5% in sterling terms while Bitcoin has surged more than 75%. FE Analytics does not cover Bitcoin, but the below chart shows how stocks linked to blockchain technologies have had a strong run.
Performance of indices over 2023 to date
Source: FE Analytics
The performance of both assets in recent weeks has been driven by turmoil in the banking sector, which sparked a market sell-off and sent investors running towards perceived safe havens.
Rob Morgan, chief analyst at Charles Stanley Direct, said: “Investor confidence in banks is shaking, with SVB and Credit Suisse the latest big names to collapse. Gold is often a financial ‘teddy bear’ investors cling to in times of crisis, so it is no surprise to see interest picking up as uncertainty strikes.”
Mirva Anttila, director of digital assets research at WisdomTree, said the strength of digital assets like Bitcoin was down to investors expecting central banks to ease policy in response to the recent bank failures – lower interest rates would benefit long-maturity assets such as digital assets.
Anttila added “we could be on the cusp of the fourth major bull market in crypto”, if advancements in speed and scalability of the blockchain networks, more intuitive user interfaces and innovations in blockchain wallets help support uptake of the technology.
Performance of bitcoin over 2023 to date
Source: Google Finance
Charles-Henry Monchau, chief investment officer at Syz Group, pointed out Bitcoin is sometimes referred to as ‘digital gold’ as its time-limited supply is one of its main similarities to precious metals. Its production will be capped at 21 million by 2140; supply growth of 1.8% today will ease to 0.9% in four years and just 0.4% in the following four years.
“Bitcoin is now scarcer than gold,” he added. “Since its launch, Bitcoin's monetary policy has made it the most robust and scarce currency on the planet.
“Bitcoin has survived many mistakes, shocks and even so-called ‘hard forks’. Bitcoin has been declared dead many times. Bitcoin mining has been banned in several countries, causing huge mining farms to be shut down immediately without any consequences for the Bitcoin network. It is this ability to survive and strengthen during crises that makes bitcoin an anti-fragile asset.”
Monchau conceded that this case was undermined somewhat by the cryptocurrency’s performance in 2022, when it showed a high correlation with tanking stock and bond markets. Last year, Bitcoin fell some 65%.
However, he believes that the historical data is “unequivocal” and shows that a 5% allocation to Bitcoin in a 60/40 portfolio improved the risk-return trade-off regardless of the period considered.
“Due to the high volatility of bitcoin, a small allocation or investment in a fund of hedge funds dedicated to digital assets may be appropriate in the current macroeconomic environment,” he said.
Not everyone is convinced though.
Charles Stanley Direct’s Morgan argued that Bitcoin’s correlation with stocks and bonds in 2022 – where market falls were ultimately down to shifting inflation and interest rate expectations – suggests that is not a reliable portfolio hedge.
“A nascent, unproven and unregulated asset, Bitcoin’s widespread adoption is far from assured, and it represents a very risky proposition. It’s why we don’t consider it, nor any other cryptocurrency, an investment,” he concluded.
“On balance, it’s worth considering bit of exposure to gold as a ‘real’ asset with wealth preservation characteristics, but bear in mind it will likely be frustrating asset to own with extended periods in the wilderness.”