Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. 2021 likely will go down as the year that cryptocurrencies, specifically bitcoin, gained widespread attention. Joining me to discuss how an investor might use bitcoin in a portfolio is Amy Arnott. Amy is a portfolio strategist with Morningstar.

Thanks for being here today, Amy.

Amy Arnott: Thanks for having me.

Dziubinski: You've been doing a good deal of research into cryptocurrencies this year with an emphasis on bitcoin. Why that particular focus?

Arnott: There are now thousands of cryptocurrencies out there, as you probably know, but bitcoin is still the largest and best-known. The outstanding market cap of bitcoin is about $1.1 trillion. So, it's about 40% or a bit more than 40% of the overall market cap in cryptocurrency. It also has the longest track record of any type of cryptocurrency. So, when people are first starting to look at this area, it's often kind of the starting point for getting a handle on what's going on in the cryptocurrency space.

Dziubinski: Some people have described bitcoin as digital gold. What do gold and bitcoin maybe have in common?

Arnott: Yeah. So, the idea is that both bitcoin and gold can be thought of as a store of value and potentially a safe haven, although the research that I did recently found that may or may not be the case for bitcoin.

Dziubinski: You recently looked at bitcoin and gold, and you compared them on a variety of different fronts. So, let's unpack some of those. Which asset has the advantage when it comes to acting as a safe haven?

Arnott: I would say definitely gold. Bitcoin has been extremely volatile. It's not unusual to see price movements of 10% up or down in a single day and much larger price movements over a week or a quarter. And if you look at periods when the market is down, gold has historically held up significantly better.

Dziubinski: How about as a portfolio diversifier?

Arnott: There, too, I think, gold has an advantage. The problem with bitcoin is it tends to be more of a risk-on asset, which means it tends to be moving more in line with stocks, whereas gold moves to its own drummer a bit more. Although to be fair, bitcoin has also had a relatively low correlation with other asset classes, just not quite as low as gold.

Dziubinski: Now this one is probably top of mind for investors today: Which has been the better hedge against inflation?

Arnott: Well, I think, it's really hard to say at this point because we really haven't seen much inflation until recently, going back several months in 2021. So, historically, gold has a mixed record as an inflation hedge. People do tend to look at it as a long-term store of value because the supply is relatively limited. And there's a similar argument for bitcoin as an inflation hedge because there's a hard cap on the number of coins that can be issued. Theoretically, it should be a good hedge against long-term inflation, but we don't really have enough data to make a definite conclusion about that.

Dziubinski: And this one is probably a little bit more obvious, but which one has the advantage when it comes to being an alternative currency?

Arnott: I think bitcoin comes closest to ticking off the boxes for what you would want to see in a currency in terms of being a store of value and a medium of exchange and a unit of measurement. Gold can also--it's historically been used as a form of currency, but it can be a little impractical just in terms of physically transporting and storage. So, I think, actually, the currency function of bitcoin is one of its most attractive use cases and where a lot of people see a lot of potential.

Dziubinski: Given all this, Amy, how should investors be thinking about, or should they be thinking about, bitcoin and their portfolios today?

Arnott: I think it's definitely a very interesting asset class that has gained a lot of attention, as you mentioned, and is becoming more of a mainstream asset class. But it does tend to still be very speculative. So, I would be cautious about putting a significant part of your portfolio in bitcoin. If you are going to invest, I would keep it to a very small percentage.

Dziubinski: Well, Amy, thanks for your time today. And I'm sure this is a topic that you and I will be pursuing again in 2022. I appreciate your time.

Arnott: Sure. Thanks a lot.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.