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- Bitcoin’s place in investment portfolios is still “highly contested” even after outperforming gold in recent months, says Societe Generale.
- The cryptocurrency faces multiple risks including regulatory threats and “confusing” messaging from bitcoin backer Tesla.
- SocGen has assigned gold a 5% weighting in its multi-asset portfolio.
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Societe Generale has concerns about bitcoin’s presence in investment portfolios after a week that saw the ever-volatile cryptocurrency plummet more than 30% in a single day. That has the firm weighing gold as a superior option – despite its recent underperformance – given its better protective qualities against inflation.
Gold’s place in investment portfolios is better understood than bitcoin’s, the bank said, adding that it has assigned gold a 5% direct weight in its multi-asset portfolio. SocGen said the metal can partially offset capital losses on bonds in the event of rising inflation, and, in cases of runaway inflation or a return to deflation, the metal has a protective role in partially offsetting losses on equities.
SocGen said gold should be held in portfolios as a stabilizer, especially as the prospect of Federal Reserve tapering lurking as a headwind for stocks, for which the firm currently has a 59% weighting. It’s an outcome that the central bank has at least discussed, according to minutes from their April meeting.
“It comes as no surprise that the place of Bitcoin in any investment portfolio remains highly contested, precisely because of its erratic price movements,” wrote Alain Bokobza, head of Societe Generale’s global asset allocation, and analyst Arthur Van Slooten in a note published Thursday.
Bitcoin’s climb from around $10,000 in September has helped keep alive debate among investors about whether it’s is a stronger hedge against inflation than gold, which is considered a traditional vehicle for inflation protection. The Fed at the end of August said it would tolerate inflation running moderately above its 2% target for a period of time in an effort to support growth in the economy and the labor market.
The cryptocurrency’s standing took a hit this past week after the People’s Bank of China said digital tokens can’t be used as a payment form by financial institutions. Bitcoin had already been hit hard this month after Tesla CEO Elon Musk said the electric vehicle maker would stop taking bitcoin as payment, citing the “insane” amount of energy required to create new coins and secure the network as reasons for the move.
“The risks to bitcoin remain on the downside,” the analysts said, counting among the risks “confusing Tesla communications, past stratospheric price movements, potential new regulations from central banks on cryptocurrencies,” as well as environmental concerns related to its data mining. In another potential regulatory blow, the US Treasury said Thursday it wants every crypto transfer larger than $10,000 to be reported to the IRS.
Following bitcoin’s “latest leg down … investor enthusiasm must surely have cooled,” SocGen said.
And they’re hardly the first firm to point out a possible shift towards gold. JPMorgan research analysts this week said institutional investors are switching out of bitcoin and returning to gold for the first time in six months amid slumping crypto prices.