Can cryptocurrency act as a hedge in a portfolio like gold?

Price of cryptocurrencies, especially bitcoins have almost trebled in 2020. This trailblazing performance in a short period has again brought cryptocurrencies in the limelight, rekindling debate on its role in the investment portfolio. Some commentators are also comparing cryptocurrencies with gold and are suggesting them to be used as a hedge in the portfolio.

Most of the experts Mint spoke with agree that these two are not comparable as cryptocurrencies are too volatile to be compared to gold which is a real physical asset. Gold has a well-established history and has proven itself as a safe-haven asset when other assets (such as equities and debt) don’t perform.

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While crypto is a virtual currency with a very short history, is completely unregulated and lacks transparency. Most of the experts we spoke to have agreed with this view. Here is what they said:

Feroze Azeez, Deputy CEO, Anand Rathi Private Wealth Management

I don’t agree that cryptocurrencies can replace gold as a hedge for the following reasons

1. Any hedge should have negative correlation to equity which is not established with bitcoins, the most popular cryptocurrency.

2. Any hedge can’t have 3 times the volatility in comparison to Nifty’s one year standard deviation. Nifty’s standard deviation is 16% where bitcoin is upwards of 40%.

3. Any hedge can’t have regulator risks which bitcoin will always have when such ballooned prices are achieved.

Amit Jain, Chief Strategist, Global Asset Class, Ashika Group

In my view gold is a real currency, which is trusted for thousand years and will continue to dominate the world as “Real Currency”. So far as bitcoin is concerned, it can never be compared with Gold. Compare it with any “Commodity” trade, where price discovery happens through demand-supply forces. Bitcoin is neither trustworthy nor transparent. It is just a speculative asset class with trading story build around it by selected media platforms.

It is a highly risky trading asset class and investors with low risk appetite should avoid it. Just to throw light on this speculative asset class, in December 2017, one bitcoin was costing almost $ 20,000 and in next one year that is December 2018, it was trading around $ 3000. This was a downfall of 85% in a single year. Have you ever seen this kind of downfall in gold? Can you ever compare such a speculative asset class with gold? Gold has store value and is accepted worldwide as an alternative currency, can you say the same for bitcoin?

Hence, in my view bitcoin is just a speculative trading product class (not even asset class), you may trade into this for making quick money, only if luck favours you. In bitcoin, apart from trading risk, there is risk of lack of uniform regulations, which raises questions over its longevity, liquidity, and universality. Also, there have been documented cases of bitcoin price manipulation, another common form of fraud. Hence we are not advising bitcoin investments to our investors.

Satyen Kothari, Founder & CEO, Cube Wealth

The amount of currency printed across the world in 2020, is startling by any measure. In just one year the amount of US dollars in circulation has increased by 20%. This, before the Christmas stimulus package of $1.4 trillion that was announced this week. While this printing has short term benefits, it will also have long term consequences. No major global currency has survived a position of supremacy for over 100 years. The US dollar is fast coming up to this mark.

Adding an asset that is not controlled by the actions of a single government agency to your portfolio is the right move based on history and a basic understanding of economics. So, what percentage of your portfolio should be cryptocurrency? Honestly, no one can give you one specific answer. I for example feel it’s between 1 and 5% of the portfolio for me. Either way, it is crucial that one builds this asset steadily to get the benefits of cost averaging.

However, I would also like to caution investors that this is a new and unregulated asset class. I don’t recommend anyone invest more than the money they consider as their “play money”. Despite the growing confidence in these assets, one should be mentally prepared to lose all of their money. If you cannot accept this before investing, best to avoid it

The comparison to gold is really a distraction. Bitcoin and other cryptocurrencies have many characteristics that differ from gold. An intangible asset cannot be fairly compared with any real-world metal. Both assets have their own pros and cons

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