When gold leads the rally, why do we still firmly allocate to Bitcoin?

Author: Lyv

Introduction

This year, gold has been on a remarkable run—in the face of trade tensions, U.S. debt fluctuations, and geopolitical tensions, gold has outperformed Bitcoin, the Nasdaq, and all major asset classes. The call for a “return of the king” has resurfaced, with gains exceeding 50% year-to-date. In comparison, “on-chain gold” Bitcoin, which has gradually gained safe-haven attributes in recent years, has only risen about 15%. This clear divergence in strength has sparked lively discussions in the market about “Why is gold strong while Bitcoin is weak?” and “Is Bitcoin still worth investing in?”

By carefully analyzing the historical pricing patterns and buying logic of gold, we still believe that Bitcoin, as an emerging safe-haven tool in the digital age, is currently experiencing a phase of “safe-haven + risk duality” in its history. In the long term, Bitcoin’s uniqueness and scarcity imply that it has a significant long-term allocation value similar to gold; meanwhile, the current global investment portfolio’s low allocation to Bitcoin suggests higher leverage and potential returns.

This article presents a systematic framework in a Q&A format, covering the evolution of safe-haven logic, the hedging mechanisms between gold and Bitcoin, long-term allocation ratios, and tail risk pricing. It also incorporates perspectives from major global institutions and investors to further demonstrate why Bitcoin deserves a higher strategic weight in current and future global asset portfolios.

Q1. Theoretically, both gold and Bitcoin have safe-haven attributes, but what are the differences in their safe-haven roles?

Answer: The market generally considers gold as a mature safe-haven asset in the traditional “carbon-based world.” Bitcoin, on the other hand, can be viewed as a new store of value in the “silicon-based world,” rather than a mature safe-haven tool, and currently still exhibits strong risk asset characteristics. We observe that before the approval of Bitcoin ETFs in early 2024, Bitcoin’s price had a correlation of 0.9 with the Nasdaq index; after ETF approval, this correlation dropped to 0.6, and Bitcoin began to follow global M2 liquidity more closely, demonstrating an “inflation hedge” property similar to gold.

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Goldman Sachs analysts pointed out that, compared to gold, Bitcoin offers higher returns but with extreme volatility. When risk appetite is strong, Bitcoin tends to perform similarly to stocks; when the stock market declines, Bitcoin’s hedging effect is less effective than gold. Therefore, gold remains more reliable as a safe-haven asset, while Bitcoin is still transitioning from a risk asset to a safe-haven asset.

Ray Dalio, founder of Bridgewater Associates, also emphasized that if investors need to maintain neutrality and diversify risk in asset allocation, they can consider gold or Bitcoin. However, he personally prefers gold, given its long-standing history as a hedge. He noted that although Bitcoin has limited supply and some store-of-value potential, it is far from matching the long-established safe-haven status of gold.

Q2. What are the main drivers of gold prices since 2007? Why did central banks become the main buyers of gold after the Russia-Ukraine war in 2022?

Answer: Since the 2007 global financial crisis, the real interest rate in the U.S. has been one of the key drivers of gold prices. Because gold itself does not generate interest (“zero-yield” asset), its price is negatively correlated with real interest rates—when real rates rise, the opportunity cost of holding gold increases, leading to lower gold prices; when real rates fall (or turn negative), gold’s attractiveness increases, and prices tend to rise. Over the past fifteen years, this relationship has been very significant: for example, after 2008, the Fed’s rate cuts lowered real yields, triggering a surge in gold; from 2013, rising real rates put downward pressure on gold prices. During the Fed’s negative interest rate period in 2016, North American ETFs saw large inflows.

After the outbreak of the Russia-Ukraine war in 2022, global central banks significantly increased their gold holdings, becoming a new dominant factor driving gold prices. That year, central banks’ net gold purchases hit record highs, exceeding 1,000 tons annually thereafter. Metals Focus data shows that since 2022, central banks’ annual gold purchases have far surpassed the average levels from 2016–2021 (which was 457 tons), with an estimated purchase of about 900 tons in 2025. These official purchases contributed to 23% of global annual gold demand from 2022 to 2025 (over 40% of investment demand), doubling the proportion seen in the 2010s. Currently, global central banks hold nearly 38,000 tons of gold, accounting for over 17% of the total surface gold, and representing 44% of investment use outside of jewelry and technology, with room for further growth.

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The World Gold Council’s latest survey shows that central banks remain optimistic about gold holdings. The vast majority of respondents (95%) expect their countries’ gold reserves to increase over the next 12 months; a record 43% believe their national gold reserves will also increase during the same period, with no one expecting a decrease.

The motivation behind central banks’ “big buying” of gold stems from 1) geopolitical hedging, and 2) reserve diversification: Western sanctions froze half of Russia’s foreign reserves during the Russia-Ukraine conflict, prompting many emerging countries to consider replacing part of their dollar assets with gold. As U.S. debt continues to grow and the credit outlook remains uncertain, the attractiveness of U.S. debt and other dollar assets diminishes, further boosting gold’s appeal as a reserve asset and safe haven.

Moreover, some large long-term investment institutions’ allocations are driven by the increasing failure of the “stock-bond pendulum”: since 2022, stocks and bonds have shown more positive correlation, diverging from the familiar 60:40 stock-bond narrative of the past 20 years:

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Q3. What major tail risks does gold’s safe-haven function primarily hedge against?

Answer: From the above analysis, it’s clear that gold’s future safe-haven value mainly lies in hedging two relatively independent types of extreme tail risks:

• U.S. debt or inflation crises (i.e., dollar credit / sovereign debt risk)
• Major geopolitical and economic conflicts

First, in scenarios of debt out-of-control or high inflation, fiat currencies may depreciate significantly or even face credit crises, highlighting gold’s role as a long-term store of value and inflation hedge. The World Gold Council’s survey of nearly 60 central banks shows that their primary motivation for holding gold is as a long-term value reserve and inflation hedge, as well as an asset that performs well during crises. Central bank officials also view gold as an effective portfolio diversifier to hedge economic risks (such as stagflation, recession, or debt default) and geopolitical risks.

For example, rising U.S. debt raises long-term concerns about the dollar’s value, and gold can serve as a “shield” in such extreme scenarios. Second, in geopolitical conflicts, gold is regarded as a safe harbor during turbulence. Whenever wars or international tensions occur—such as the 2018 China-U.S. trade war, the 2022 Russia-Ukraine war, or the 2025 U.S. tariff shocks—safe-haven capital flows into gold tend to push prices higher. Historical backtesting also shows a positive “power-law” relationship between gold prices and trade policy uncertainty (Trade Policy Uncertainty Index) over the past decade:

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This explains why recent gold outperformance over Bitcoin: during the renewed escalation of China-U.S. trade tensions, central banks and long-term investors, as major allocators, combined with rising uncertainty about the long-term bull market of U.S. debt, tend to favor assets they are more familiar with: gold.

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Q4. How should the allocation ratio of gold in an ideal portfolio reflect expectations of tail risks?

Answer: Gold is often likened to an “insurance” in an investment portfolio—it may drag down returns during normal times but provides protection during crises. Therefore, when managers perceive an increased risk of extreme events in the future, they tend to raise gold holdings as a safe-haven. Gold can significantly mitigate potential losses during periods of financial stress, demonstrating stable diversification benefits during severe market downturns (“left tail” events). Since part of gold demand comes from central banks, the tech industry, and consumers, its price movements are not fully synchronized with financial assets. Some asset allocation frameworks specifically reserve gold for tail risk hedging: for example, some insurance funds and pension funds consider gold a highly liquid asset that can be liquidated during extraordinary times to offset losses in other assets.

In short, the weight of gold in a portfolio can be viewed as a reflection of the fund manager’s subjective probability of extreme tail events. If the manager believes the probability of such tail risks occurring within the next 5–10 years is rising, increasing gold’s proportion in the portfolio is reasonable. This allocation is akin to purchasing insurance for the portfolio, with the proportion reflecting the manager’s subjective assessment of catastrophic event probabilities.

Let’s consider a simple thought experiment: if we estimate the probability of these two major risks materializing within the next 5 years at 10% (e.g., 5% + 5%), then the proportion of risk assets should also increase accordingly. If over the next 10 years, the probability rises to 15–20%, then the allocation should also rise to 15–20%. Over time, we believe the likelihood of these tail risks materializing is increasing.

Q5. How are gold and Bitcoin currently allocated in global asset portfolios? What are market opinions on increasing their weights?

Answer: According to Goldman Sachs’ latest research, the current global investment portfolio allocates about 6% to gold and only about 0.6% to Bitcoin, roughly one-tenth of gold’s share (with a smaller market cap). This indicates that Bitcoin’s role as an asset class is still in its early stages (compared to gold, which is already mainstream).

Given recent global macroeconomic turbulence, many prominent institutions and investors are calling for increased allocations to gold (and to some extent, Bitcoin). Ray Dalio of Bridgewater recently explicitly stated that from a strategic asset allocation perspective, the proportion of gold should be increased to around 10–15%, significantly higher than the typical 5% advised by traditional investment consultants. Notably, Dalio previously recommended only about 1–2% allocation to Bitcoin / gold in 2022, but now, due to rising risks, he has increased this multiple times to 15%, reflecting a reassessment of the importance of safe-haven assets.

Other well-known investors have issued similar opinions: for example, Jeffrey Gundlach, founder of DoubleLine Capital, recently suggested that allocating nearly a quarter (25%) of the portfolio to gold is not unreasonable. Some research and historical backtests support higher gold proportions: a long-term simulation by an asset management firm shows that a gold allocation of about 17% yields the highest risk-adjusted returns.

Regarding Bitcoin, as institutional attitudes shift, some suggest moderate increases in its allocation. For instance, Grayscale recommends considering Bitcoin as one of the “core assets,” with a suggested allocation of 5–10%. Overall, current global gold allocations far exceed Bitcoin’s, but there is a widespread view that increasing both in traditional portfolios can enhance resilience against extreme risks.

Q6. Returning to our thought experiment: if we estimate a 10% tail risk over the next 5 years and a 20% tail risk over the next 10 years, how should we adjust the allocations of hedging assets like gold and Bitcoin?

Answer: Under this assumption of non-negligible tail risk probabilities, investors should significantly increase their safe-haven allocations beyond conventional levels. Experience shows that when extreme event risks are anticipated, proactively allocating to assets like gold and Bitcoin helps protect the portfolio from shocks. This approach is similar to a “Black Swan” hedge: using a small portion of costs to hedge against low-probability, high-impact risks.

Mapping probabilities to allocations, to hedge a 20% tail risk, the portfolio should hold an equivalent proportion of safe-haven assets—meaning the combined allocation of gold and Bitcoin should reach 20%. For example, increasing gold to 15% and Bitcoin to 5% would raise gold’s share from about 6% to 15% (a 2.5x increase), and Bitcoin from roughly 0.6% to 5% (an over 8x increase).

This suggests that in an idealized safe-haven portfolio, Bitcoin’s potential for relative increase (compared to current levels) is much larger than gold’s. Since gold is a mature asset with a substantial existing allocation, further doubling requires enormous capital. Conversely, Bitcoin’s starting point is low, so even several-fold increases keep its share relatively small. This large potential for increase also means Bitcoin’s price sensitivity to incremental allocations is higher—small capital inflows can significantly push its price upward.

In practice, institutional investors are already reflecting this idea. Some major banks have begun to incorporate crypto assets into their maximum allocation limits to hedge systemic risks. For example, Morgan Stanley’s latest recommendations include a maximum of 4% allocation to cryptocurrencies for high-risk clients, with conservative portfolios not yet allocated.

Additionally, some analysts suggest that if Bitcoin gradually attains a reserve status similar to gold, its market cap could approach that of gold. While this requires many assumptions, the potential for increased allocation ratios indicates that Bitcoin offers a greater leverage for global asset allocation (2.5x vs. 8.0x for gold). This is why many institutional investors, while emphasizing increased gold holdings, are also paying attention to allocating a certain amount of Bitcoin: combining both assets can hedge traditional financial risks and capture the excess returns from emerging safe-haven assets.

Q7. Compared to gold, what are the main advantages or unique features of Bitcoin as an asset in a portfolio?

Answer: From a purely economic design perspective, Bitcoin, over the long term, could be a more suitable safe-haven asset than gold, especially in facing the two tail risks discussed above, as it may demonstrate more robust hedging capabilities.

First, supply rigidity. Bitcoin’s issuance is permanently capped at 21 million coins, unlike fiat currencies that can be infinitely printed, or commodities where new reserves can be discovered or recycling efficiency improved. This “silicon-based digital scarcity” makes Bitcoin a scarce asset similar to gold, with long-term inflation-resistant value storage potential. More importantly, Bitcoin’s annual inflation rate has fallen below 1% after the 2024 halving, well below gold’s annual new supply of approximately 2.3%.

Second, the “Buy and Hold” participation remains low. Our analysis shows that current mainstream institutional holdings of Bitcoin are small, with “Buy and Hold” participants holding no more than 10%. Including all ETF holders, the total is only about 17% (many ETFs include hedge funds and retail investors, not just “Buy and Hold”). In contrast, gold “Buy and Hold” investors already account for about 65% of investment gold by the end of 2024, with central banks holding 44%, and ETF holdings only 4%.

This indicates that as recognition increases, the potential for future increased allocation is enormous. BlackRock CEO Larry Fink recently called Bitcoin the “new gold” and supports including it in pension and long-term funds.

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Third, on-chain transparency. All Bitcoin transactions are recorded on a public blockchain, accessible for verification by anyone. This unprecedented transparency enhances market trust, allowing investors to monitor the flow and reserves of Bitcoin in real time, eliminating the “black box” of assets. In contrast, central bank gold reserves and OTC trades often lack real-time transparency.

Fourth, decentralized censorship resistance. The Bitcoin network is maintained by countless nodes worldwide, with no central authority able to unilaterally control or invalidate transactions. This decentralization provides strong censorship resistance—no country or institution can freeze or confiscate Bitcoin accounts, nor dilute its value through issuance. In extreme cases, non-physical gold holdings also face counterparty risks; during wars, gold can be subject to embargoes or confiscation, whereas Bitcoin only requires electricity, internet, and a private key to store and transfer value.

In summary, Bitcoin’s fixed supply and technological architecture endow it with inherent anti-inflation, low correlation, and censorship-resistant qualities. These features position Bitcoin to potentially serve as a digital store of value and risk hedge in long-term asset allocation, complementing gold and other safe-haven assets.