Whatever bitcoin might be, it isn't a substitute for gold bullion.
Specifically, it fails as a hedge.
"I would call gold more of hedge and bitcoin more of a speculation," says Jack Ablin, chief investment officer at Chicago-based Cresset Capital Management.
A good hedge helps reduce overall risk in an investment portfolio because its price movements will typically be uncorrelated with those of other investments. Put another way, the price of a hedge or safe-haven investment will zig when the prices of other assets zag.
When that happens, you have a less risky portfolio. And that's where gold beat bitcoin hands-down recently.
Gold Performed but Bitcoin Didn't
Last week when worries over a possibly-deepening U.S.-China trade war sent stocks sliding, gold prices rallied. Over the week from Aug. 9 through Aug. 16, the SPDR S&P 500 (SPY) exchange-traded fund, which tracks the S&P 500 index, fell 1.2%, while the SPDR Gold Shares (GLD) ETF, which holds solid bullion, rallied 1.1%, according to data from Yahoo.
Indeed, gold zigged while stocks zagged.
However, bitcoin followed stocks down, and then some more, over the same period. One bitcoin went for $11,294 at the end of day on Aug 9, but that price dropped 9.5% to $10,221 by the close of business a week later, according to Yahoo.
Bitcoin not only failed as a hedge -- it didn't zig when stocks zagged -- but it would have increased the risk of any stock portfolio that held it. When the major indexes fell, it dropped far further.
That's precisely the opposite of what investors should want in a hedge.
What About in a Real Crisis?
What should really matter to investors is how gold or bitcoin perform in a true crisis, rather than the blip we saw last week.
Unfortunately, bitcoin is just too new for us to know, with the cryptocurrency only getting going as an ultra-niche product about a decade ago.
Gold, on the other hand, has been seen as a valuable asset for 5,000 years. That means we can easily look back and see how gold performed in past times of market stress.
"It's probably the oldest asset class we have," says Ablin. "In terms of data, there is a lot more information."
Solid Gold History
During the financial crisis of 2007-2009, gold performed well as a portfolio hedge.
In late 2007, stocks started falling and kept doing so until they reached their bottom in March 2009. Meanwhile, gold rallied.
We can't compare this to bitcoin's performance, however, because the first bitcoin didn't get mined until 2009. Simply put, we don't know how bitcoin prices would perform in a true crisis because it hasn't been a mainstream asset yet through any such period.
We can't even look at last week's stock market moves as much of an indicator because they weren't comparable to the mega-stock-moves of yore. Last week wasn't anything like a repeat of the crash of Black Monday 1987 when U.S. stocks fell more than 20% in a single day.
Maybe bitcoin will measure up during the next major crash. But we'll have to wait and see.
Bitcoin as a Speculative Asset?
There is some good news for bitcoin fans. As Ablin says, the cryptocurrency looks more like a speculative investment.
On that front, the cryptocurrency has performed admirably. Over the last five years, bitcoin has been on a roller-coaster ride, soaring more than 2,100%, whereas the SPDR Gold Shares ETF has climbed a mere 14% over the same period.
But with that stellar return has come significant volatility. In late 2017, bitcoin prices reached their all-time high of almost $20,000 before sliding back to a recent low of less than $3,200 in December 2018. That's a fall of more than 80% over the course of 12 months.
Prices for bitcoin have subsequently rallied again to $10,746 recently, according to Yahoo data.
Yes, the returns look great, but the ride has undoubtedly been a wild one for anyone who's been brave enough to endure it. And it certainly hasn't resembled anything close to a hedge for other investment classes.
Constable owns none of the securities listed in this story.