Gold vs Bitcoin hedge debate

THE ongoing debate about whether gold or bitcoin offers a better hedge has intensified, following their impressive performance in 2024.

Spot gold has surged around 15% year-to-date, reaching new records and surpassing the US$3,000-per-ounce level since last month, while bitcoin more than doubled in value, crossing the US$100,000 mark for the first time in the early part of this year, before moderating to around US$80,000 to US$90,000 in recent weeks.

Swiss wealth management firm Julius Baer weighs in on the debate, emphasising the key differences and similarities between the two assets. “Gold and bitcoin share many similarities. Both are supply constrained, and their demand is not exposed to the ups and downs of the economic cycle,” the firm states.

Julius Baer notes that the introduction of exchange-traded funds (ETFs) has been a significant success for both, driving wider adoption. Despite these parallels, the firm highlights their fundamental differences.

“Gold is a natural asset and has earned its reputation as a safe haven and store of value over thousands of years,” it observes.

Bitcoin, on the other hand, is described as a technical asset that emerged at the end of the 2008/09 Global Financial Crisis, when trust in the traditional financial system was at an all-time low.

Assets with limitations

On the supply side, both assets are constrained but in distinct ways.

“For gold, these constraints are geological,” says Julius Baer.

Mining costs have climbed steadily, with the average cost per ounce rising from US$1,000 to about US$1,400 in the past decade. Meanwhile, bitcoin’s supply limitations are technical, with the blockchain protocol restricting the total number of tokens to 21 million.

Julius Baer points out, “Mining bitcoin is technically difficult and involves a self-regulating mechanism to avoid issuing more bitcoins than the protocol’s growth rate.”

Interestingly, Julius Baer draws an energy parallel between the two. “The energy needed to solve bitcoin’s cryptographic puzzles is equivalent to the energy needed to mine gold,” it highlights, adding that both are, to some extent, backed by the significant energy required to produce them.

On the demand side, Julius Baer notes that appetite for both assets stems from investor sentiment rather than economic cycles. However, their roles in times of financial distress diverge significantly.

“Gold has demonstrated its safe-haven status multiple times in the past, while bitcoin is designed to provide robust security and a high degree of decentralisation,” it explains.

Addressing concerns about dedollarisation, Julius Baer suggests that both gold and bitcoin act as “anti-dollars”, offering protection against the weakening of the greenback.

However, while both can hedge against “bad inflation” arising from excessive monetary expansion, Julius Baer stresses that “gold typically demonstrates its safe-haven status, holding its value or even increasing it” during equity market corrections. Bitcoin, however, remains a “risk-on” asset that tends to move with equity markets, posing downside risks during such corrections.

Despite acknowledging bitcoin’s potential, Julius Baer warns investors to be cautious.

“As of today, bitcoin often behaves as a risk-on asset. It tends to suffer quite strongly when risk aversion spreads in financial markets, resulting in reduced diversification benefits,” it notes. In contrast, “gold typically tends to keep its value during such risk-off periods”.

Bullish outlook

Bitcoin is currently trading below US$90,000 – a significant decline from its January peak of over US$109,000. Despite recent weakness, some market analysts appear to remain bullish on bitcoin’s price trajectory, with forecasts ranging from US$180,000 to US$250,000 by year-end.

High-net-worth investors, or “new whales”, have been reportedly accumulating bitcoin aggressively. Reports, citing CrytoQuant, note that since November 2024, these new whales have amassed over one million bitcoin, including 200,000 bitcoin in the past month alone, potentially indicating strong confidence in bitcoin’s long-term outlook.

Crypto analyst Madden suggests a possible rally above US$100,000 in the medium term, while Standard Chartered head of digital asset research Geoff Kendrick predicts that bitcoin could hit US$200,000.

Meanwhile, gold prices surged to a record high above US$3,160 an ounce over the week, as the US unveiled a new set of trade tariffs and economic uncertainties intensified.

The US Federal Reserve’s decision to keep interest rates steady has reinforced optimism for gold’s upward trajectory.

Goldman Sachs Research, for one, forecasts gold prices to climb further to US$3,100 per ounce by year-end.

With both gold and bitcoin showing impressive growth this year, Julius Baer acknowledges the “digital gold” analogy but cautions that bitcoin’s risk profile differs significantly.

For investors seeking stability during market turmoil, Julius Baer asserts that “gold remains the better hedge” due to its proven resilience during financial stress and economic uncertainty.