On Aug. 20, in a post on X (formerly Twitter), Tether Chief Executive Officer Paolo Ardoino riffed on a clever equation that speaks deeply to the reasons that many investors bother holding Bitcoin (BTC -1.09%) and gold assets like the SPDR Gold Shares ETF (GLD +0.32%), stating that "Bitcoin + Gold = hedge against doom." Bitcoin is up 23%, and gold is up 15% during the 30 days ended Aug. 25, amid market jitters over inflation and economic disruption from the U.S.-Israeli war with Iran.
But is that just a coincidence, or is it evidence supporting what Ardoino was getting at?
Image source: Getty Images.
This coin hasn't been a great inflation hedge so far
Let's assume that by "doom," Ardoino is referring to financial or economic doom, as suffered by investors and created by adverse conditions such as inflation or persistently low or negative growth rates in the market or the economy.
Gold's reputation for being a guard against everyday inflation or monetary debasement goes back thousands of years. It's persistently scarce and somewhat difficult to produce, widely accepted as a store of value across different epochs and civilizations, and it can't be printed like money. One of the main drawbacks of investing in it is that, over the long run, the price of gold is fairly stable, so it doesn't deliver much in the way of growth even during periods when growth is easy to come by.
NYSEMKT: GLD
Key Data Points
Bitcoin, on the other hand, hasn't exactly held up against inflation recently. During the 12 months ended Aug. 25, its price is down 30%, whereas the U.S. Consumer Price Index (CPI) is up by 3.4%; gold is up by 39% in the same period.
Look at a different period, and the picture is worse. CPI inflation peaked at 9.1% in June 2022, and Bitcoin ended that year down 65%. That time around, gold fell by 0.7% -- not great, but considering the brutal bear market of 2022 stoked by the Federal Reserve's rate hike regimen, it could have been a lot worse.
So it isn't the case that Bitcoin is resilient in periods where other risk assets are struggling. Nor does it tend to outperform when gold is climbing, which suggests that investors fleeing to safety choose, on average, don't pick Bitcoin. That casts a bit of doubt on the validity of the equation proposed by Tether's CEO.
It's still a good idea to own both of these assets
Bitcoin might not save you from doom, but it's still a good asset to partner with a gold allocation in your portfolio.
CRYPTO: BTC
Key Data Points
Generally speaking, gold gains when investors feel fearful, and it also benefits from a steady drip of central banks purchasing it regardless of the price, not to mention Ardoino's Tether, which holds a vast amount of the metal. Bitcoin, meanwhile, gains when there's excess liquidity in the market -- one set of conditions that tends to create the inflation that gold protects against -- and rallies when the cost of borrowing is lower. Sometimes, that's a powerful combination, as in the week ended on Aug. 21, when the U.S. Treasury reported it would at least double its Treasury buybacks, causing both bond yields and the dollar to sink and Bitcoin and gold to fly.
One can also hypothesize that if the market were simultaneously in a state of fearfulness and high liquidity, with the expectation that inflation would be increasing rather than decreasing, both assets would do well for as long as those conditions persisted.
Separately, stagflation, the macroeconomic state of an economy experiencing low growth and elevated inflation, could well be similarly buoyant for gold and Bitcoin, especially if the Federal Reserve slashes interest rates to try to stoke more growth. And given the ballooning U.S. national deficit and flaccid consumer economy, that's a real possibility for the near future.
So it makes sense to hold both gold and Bitcoin in your portfolio -- a 5% allocation to each could work to soften the blow of whatever inclement conditions come next. Even if Ardoino's equation might be a little overstated, it contains more than just a kernel of truth.
