Gold has long been the go-to asset during times of financial uncertainty. If you have a queasy feeling in the pit of your stomach about what's going to happen next, you buy gold. So is it really possible that buying crypto -- an asset famous for its volatility -- could be a way to risk-proof your portfolio?
Billionaire hedge fund investor Paul Tudor Jones thinks so. As he surveys the current geopolitical and macroeconomic environment, he's looking at both gold and Bitcoin (BTC 4.69%) as potential safe-haven assets. If he's buying Bitcoin now, should you be too?
Bitcoin as a safe-haven asset
There are two unique features of Bitcoin that make it a potential safe-haven asset. For one, Bitcoin is a digital asset that has been programmed to behave in a certain way. The Bitcoin algorithm carefully controls how much Bitcoin can be issued at one time, as well as the total lifetime supply of Bitcoin. The goal is to make Bitcoin inflation-resistant.
The recent Bitcoin halving is yet more evidence of this algorithm at work, since it cuts in half the rate of new Bitcoin issuance. As Coinbase Global told its institutional clients, this makes Bitcoin a "programmatically disinflationary asset." Bitcoin has literally been programmed to act as a hedge against inflation.
Image source: Getty Images.
The other unique feature of Bitcoin is that, until the launch of the new spot Bitcoin ETFs, it was almost completely untethered to the traditional financial system. In fact, Bitcoin was created as a reaction to the financial crisis of 2008, and every effort was made to free Bitcoin from the system of Wall Street intermediaries and central banks. That's why Bitcoin was largely uncorrelated with the broader financial markets for much of its existence.
And that lack of correlation with the broader market is exactly what makes Bitcoin potentially so valuable during times of trouble. Bitcoin can zig, while other assets zag. Sound familiar? That's exactly why people buy gold. If their stock market investments are declining in value, at least their gold holdings are going up in value. The same is potentially true with Bitcoin as well. That's why some people refer to Bitcoin as "digital gold."
How much Bitcoin do you need in your portfolio?
Hedge fund manager Paul Tudor Jones is no stranger to the crypto game. Since May 2020, he has suggested a Bitcoin allocation of at least 1%-2% for a diversified portfolio. At times, he has even hinted that he might boost that allocation to as high as 5%. The amount you decide to allocate to Bitcoin in your portfolio, of course, depends on how much risk you see in current events.
According to Jones, the major source of risk these days is geopolitical risk. "This might be the most threatening geopolitical environment I've ever seen," he said. He was specifically referring to events in the Middle East, but he could just as easily be talking about events in Ukraine or Taiwan.
But that's not all. Jones also sees a massive "debt bomb" for the U.S. economy. It's no secret that the U.S. government has accumulated a staggering amount of debt, and at some point, the chickens are going to come home to roost. For that reason, he says, "I can't love stocks, but I love Bitcoin and gold."
Bitcoin or gold, or both?
Many investors assume that you only have a single option to risk-proof your portfolio: buying gold. And, indeed, if you've spent any time on social media recently, you might be shocked at how many people are talking about buying gold these days. Who would ever have thought that Costco would have so much success selling 1-ounce gold bars to its customers?
But physical gold is not the only game in town during these turbulent times. If you are looking to risk-proof your portfolio, you also might want to consider "digital gold." It sounds counter-intuitive, but by allocating just a tiny portion of your portfolio to Bitcoin, you might be able to mitigate some of the risk due to the current geopolitical and macroeconomic environment.
