When investors buy alternative assets, they typically look for two things.
First, they want to know how the asset will perform as a safe-haven asset during times of market volatility.
It should be clear that over the last month we have seen plenty of market volatility. Stocks have made some wild intra-day swings, starting the day substantially up and then ending lower than the previous close.
In addition, the S&P 500 index, which gets tracked by the SPDR S&P 500 exchange-traded fund, lost more than 8%, so far in October.
While stocks fell, gold prices gained. Prices for the yellow metal started the month at $1,189 a troy ounce and were recently trading at $1,220, according to data from Bloomberg.
Meanwhile, Bitcoin, which has been much heralded as a new alternative asset, lost value. The price of one Bitcoin started the month fetching $6,573 and was recently trading for $6,271. That’s a drop of more than 4% so far in October.
In this case, it should be clear that during the volatile month of October gold was a far superior safe-haven asset than was Bitcoin.
The second thing that investors usually want from an alternative asset is diversification. That is to say, when they choose assets for a portfolio, they typically want to make sure that the returns on the different assets don’t all move up and down in the same direction. In other words, they want assets that are diversified. When one asset price zigs, the hope is that another asset price will zag.
Gold performed that function admirably during October. While stocks slid, gold rallied, albeit it a little. There was a zig for the zag.
The presence of assets that zig when the others zag would have reduced overall risk for the portfolio with stocks and gold.
That didn’t happen with Bitcoin. While stocks zagged, so did Bitcoin. Put simply, Bitcoin wouldn’t have acted as a diversifier for a portfolio that had a significant weighting of stocks. As a result, there would be no risk reduction for such a portfolio, at least over the past month.
Admittedly, a month isn’t much of an investment time horizon to look at. But at least during the troubled last month, Bitcoin fell flat on its face as a portfolio diversifier.
So far, at least, Bitcoin isn’t really doing much of a job as an alternative asset when compared to gold.