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Clients have a finite amount of cash that can be deployed meaning that even the most diverse portfolios have ceilings on the amount of included securities. As a result, some asset classes compete for space or are outright ignored.
Alternatives are often under-allocated to client portfolios, languishing at the expense of bonds and stocks. That despite clients increasingly wanting alts exposure, advisors seeking avenues for reducing portfolios’ correlations and a plethora of studies showing portfolios with even a small amount of alts exposure outperform over the long-term.
It’s not that advisors are reluctant to consider alts. They’re not. Previously, one of the big hurdles to alts adoption was right-sizing it for client portfolios. Said another way, getting the percentages right was a task unto itself. Fortunately, that issue has waned as 5% to 10% has become a decent rule of thumb for alts exposure.
More recently, another issue has emerged: alts competition, or rivalries between two different alternative assets. The big one is bitcoin vs. gold, but things don’t have to be this way.
A Contrived Rivalry
Not long after its birth 16 years ago, bitcoin frequently was compared to gold, even landing the oft-used “digital gold” label. That implies this is a natural rivalry and it is. It’s also one that doesn’t need to exist because the cryptocurrency and the yellow metal can coexist within the confines of a single portfolio. Data indicate that’s a strategy some high-net-worth (HNW) investors may already be employing.
Since March 2023, the “percentage of high net worth (HNW) investors holding gold has increased from 20% to 38% — a 90% jump in only 15 months. Crypto climbed steadily in the same timeframe. Today, 31% of HNW investors hold the asset, a nearly 50% increase,” notes State Street Global Advisors (SSGA).
In fact, the SSGA research points out that nearly a quarter of HNW investors polled own both bitcoin and gold. Upon further examination, allocations to both make sense because gold isn’t just a portfolio diversifier – it’s a stabilizer. On the other hand, bitcoin has become correlated to stocks and has a well-documented penchant for volatility.
“Crypto, on the other hand, has faced seismic volatility in its short history, with an almost routine cadence of new highs, retractions, and rebounds. Yet, this market continues to regain its footing, due in large part to the undeniably revolutionary attributes of blockchain technology,” adds SSGA.
Bitcoin, Gold: An Ideal Match?
In some respects, bitcoin and gold, when properly portioned, belong together in a portfolio. Gold offers the aforementioned advantages of reduced volatility and long-running, low correlations to stocks and bonds. Likewise, bitcoin’s volatility is improving, potentially opening the door to inclusion in a broader set of investor portfolios.
“But crypto isn’t as unpredictably combustible as it once was. The market is maturing, regulatory barriers are falling, and volatility is subsiding — over the past seven years, Bitcoin’s volatility has trended downward, to a point where its risk profile mirrors those of major tech stocks like Meta and Amazon,” observes SSGA.
Bottom line: bitcoin and gold don’t have to be rivalries. When allocated to properly, they can be strong complements in a single portfolio.
Related: The Unexpected Demographic Driving Gold’s Popularity