Bitcoin Could Replace Gold in Investment Portfolios
The trading price of bitcoin broke through the $60,000 level recently, leading some financial experts to wonder if investors snapping up the digital asset are creating a speculative bubble. But two Schulich researchers say the digital currency is still a legitimate replacement for gold in an investment portfolio.
Novel research conducted in 2018 by Irene Henriques and Perry Sadorsky, Schulich Professors of Sustainability and Economics, examined whether bitcoin – often referred to as “digital gold” – can replace gold as a traditional hedge against inflation and safe-haven investment.
The research paper, titled “Can bitcoin replace gold in an investment portfolio?”, was published in the Journal of Risk and Financial Management and examined the impact of introducing bitcoin to investment portfolio characteristics and returns. The researchers compared the economic value of portfolios substituting bitcoin for gold using a variety of statistical models, including GARCH, and a benchmark portfolio that included US equities, US bonds, US real estate, EAFE equities, and gold.
“If investors want bitcoin as an investment asset and don’t want to be bothered going through the process of buying cryptocurrency and acquiring a crypto wallet, they can simply buy a cryptocurrency ETF,” says Henriques. “This is equivalent to people who do not want to hold gold per se, but rather a gold ETF, which follows its price across time.”
The researchers caution that bitcoin is still a speculative investment and should not be the only focus in an individual’s investment portfolio.