Is Gold Still the Best Inflation Hedge?

Bitcoin is on its way to becoming gold 2.0 but for now, gold is still a strong hedge against inflation and probably will be for a long time.

A good store of valuable is six things: durable, divisible, portable, uniform, accepted and scarce, said Travis Kling, CEO of digital asset management firm Ikigai, and the only thing bitcoin is not is accepted.

“Gold is certainly more accepted than bitcoin and is a foundation for the central bank-led fiat currency system that the world runs on right now,” he said.

In order to prove itself as a more reliable asset in the long term, and gain wider acceptance as a result, bitcoin’s price volatility needs to come down, industry participants agree. That will happen as bitcoin’s market structure continues to mature and improve. 

However, to some extent, there will always be some level of volatility in bitcoin because it’s perfectly inelastic, said Ria Bhutoria, head of research at Fidelity Digital Assets – meaning there’s no change in the quantity of bitcoin supplied when its price changes.

“With gold, volatility can be managed because production can accelerate or decelerate in response to demand, but you don’t have that for bitcoin,” she said. “Relative to other assets, it might continue to be slightly more volatile, even after market structure has matured completely.”

Bhutoria added that this past year was the first time in bitcoin’s lifetime that it has experienced such extreme volatility in the face of a global economic crisis.

“We’ll have to continue to see how it fares in future crises and how it responds and how sentiment – from both retail and institutional investors – changes in light of those crises,” she said.

Kling said more widespread acceptance is happening today. The ability to own and custody bitcoin safely and securely was an important step that he considers solved by reputable third-party custodians like Coinbase, BitGo or Gemini. 

There’s less regulatory uncertainty, Kling added. The Commodity Futures Trading Commission regulates the derivatives market of digital assets and views bitcoin as commodities, the Securities and Exchange Commission oversees products that contain bitcoin but has said it is not a security. The Office of the Comptroller of the Currency has said some banks and savings associations can provide cryptocurrency custody services for customers and has begun allowing digital asset firms to obtain a national trust charter. Plus, the United States also has a Senator, Cynthia Lummis (R-WY), who believes bitcoin to be superior to paper money as a store of value and has said she plans to teach Congress how it can help reduce the national debt.

And the risk of regulating bitcoin is low because even though the digital asset isn’t yet mainstream, the number of businesses with exposure to it is significant. In the last few months high-profile institutional investors like MassMutual have begun building positions in bitcoin.

“They’re the ones close to individuals that actually make regulations,” Kling said. “When you see MassMutual buy $100 million —that is a firm that’s older than the lightbulb, and is extremely well connected into the political and regulatory process in the United States. So from a regulatory perspective, it’s pretty safe to own bitcoin at this point.”

Sunayna Tuteja, head of digital assets and distributed ledger technologies at TD Ameritrade, said regulators have given credibility to the narrative that bitcoin is digital gold. One thing bitcoin has on gold, she said, is easier upkeep of the supply.

“In March when the entire world came to a screeching halt, prices skyrocketed which impacted gold mining,” she said. “There’s only so much gold, you can’t get to that gold if you don’t have the infrastructure and manpower to mine. But bitcoin mining didn’t stop, it doesn’t have the same capital costs or infrastructure issues, it’s computational mining.”

Bitcoin should be a complementary play though, not a competitive one, Tuteja said. Usually investors want to have some part of their portfolio in scarce assets that provide a preservation of value as an inflation hedge, but when it comes to bitcoin and gold it’s not an either-or decision.

“There’s asset price inflation that will continue and bitcoin will hold up extremely well to it,” Kling said. “If you want to be able to buy the same amount of the S&P 500 down the road as you can today, bitcoin is a great way to have a good degree of confidence you’ll be able to, probably more so than gold. But bitcoin is also still in its early stages there’s ways in which it can fail. So having an outsized position in bitcoin carries a lot of risks and you need to size it accordingly.”

Kling agreed people should allocate to both bitcoin and gold in their portfolio. He tells people to allocate between 2 and 5 percent, and said 10 percent is aggressive, though there are certainly bitcoin bulls who allocate that much.

“More and more, gold and bitcoin are being seen as alternatives to each other, it just depends on an investor’s comfort level,” said Michael Sonnenshein, CEO of digital asset manager Grayscale.

Grayscale was founded in 2013 but gained wider attention two years ago after rolling out a national ad campaign encouraging people to “drop gold.” 

“Gold has historically had low inflation of about 2 to 3 percent, making it a good hedge against monetary inflation,” Sonnenshein said. “It is certainly less volatile than bitcoin, but as we continue to transition into a digital world, we think it makes sense to also hold digital money.”