Crypto vs. Gold: As Recession Fears Loom, Which Is the Superior Hedge?

All eyes are now on gold as the ultimate safe-haven asset. The price of gold just hit $3,000 per ounce, an all-time record. That comes amid a correction in the equity markets, a substantial decline in the crypto market, and widespread concerns about what's going to happen next with U.S. economic policy.

But don't forget about Bitcoin (CRYPTO: BTC), which has often been referred to as "digital gold." A growing number of top investors now consider Bitcoin to be superior to physical gold as a store of value, a hedge against inflation, and a safe haven amid economic uncertainty. But is it?

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The Bitcoin vs. gold debate

To answer that question, it's important to understand the unique characteristics and features of Bitcoin. Most importantly, the total lifetime supply of Bitcoin is capped at 21 million coins, and nearly 20 million coins are already in existence. That imbues Bitcoin with tremendous scarcity. Almost all the Bitcoin that will ever exist already exists.

Image source: Getty Images.

But that's not all. Bitcoin is also completely decentralized, meaning that no central bank, sovereign government, or Wall Street investment bank can alter the underlying Bitcoin algorithm.

One of the unique features of this algorithm is the Bitcoin halving mechanism. Every four years, the rate of new Bitcoin supply is cut in half, making it a disinflationary asset over time. This is a key reason why so many people believe that Bitcoin can be a powerful hedge against inflation.

Due to the cryptographic nature of blockchain technology, Bitcoin is also highly resilient against government expropriation or other forms of asset seizure. This is one reason why billionaire Ricardo Salinas -- one of the five richest people in Mexico right now -- refers to Bitcoin as the "hardest asset in the world" -- even harder than gold.

And there's one more feature of Bitcoin that makes it so unique. It is purely digital, and can be moved across borders nearly instantaneously. Bitcoin was originally designed to be a peer-to-peer digital currency, without the need for any third-party intermediaries. While the cost of transferring Bitcoin to someone else is not free, you don't need a bank or some other financial institution to step in and collect a fee.

Gold ETFs vs. Bitcoin ETFs

For the sake of argument, let's assume that you are not planning to invest in either Bitcoin or gold directly. That is, you're not planning to buy Bitcoin in the spot crypto market, and you're not planning to buy gold bars at Costco.

Instead, you're likely to invest in both Bitcoin and gold via exchange-traded funds (ETFs). Doing so enables you to change your portfolio allocation mix easily and effectively. The most popular spot Bitcoin ETF is the iShares Bitcoin Trust (NASDAQ: IBIT), so let's compare its performance to that of its cousin, the iShares Gold Trust (NYSEMKT: IAU), over the past 15 months.

iShares Bitcoin Trust chart by TradingView

As you can see from the chart, the iShares Bitcoin ETF has outperformed the iShares gold ETF over the past year when the market was flat or moving higher, but it has badly underperformed the gold ETF during negative market conditions (such as those we're experiencing now). That helps to explain why so much money is now flowing into gold ETFs. People are legitimately concerned about their economic future, and some have already hit the panic button.

This recent performance is particularly disappointing for Bitcoin supporters, because it neuters the argument that Bitcoin can be a useful hedge during recession or extreme market pullbacks. The same phenomenon happened in 2022, when Bitcoin lost 65% of its value, amid a broader market downturn.

Which is the superior recession hedge?

Theoretically, "digital gold" should offer the same (or maybe even superior) hedge against recession as physical gold. But as we all know, real life doesn't always follow theory. If you are extremely concerned about a recessionary downturn eroding your hard-earned savings, it looks like gold is the better hedge. You simply can't argue with its 4,000-year track record.

That being said, I'd be open to changing my mind if one key thing happens: Bitcoin loses some of its correlation with the equity markets. A low correlation with stocks was what made Bitcoin so special over the past decade; it seemed to be completely uncorrelated with any major asset class, and that provided enormous diversification benefits.

But if Bitcoin is going to sink in value every time that equity markets do, it becomes much less useful as a hedge. It's embarrassing to admit defeat at the hands of the gold bugs, but that looks like the final outcome here. Until Bitcoin can zig when stocks zag, gold looks to be the superior recession hedge in 2025.

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Dominic Basulto has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and Costco Wholesale. The Motley Fool has a disclosure policy.