• Analysts at Societe Generale said the risks to bitcoin "remain on the downside" and explained why the cryptocurrency isn't the same as gold.
• The cryptocurrency sector has seen massive volatility recently, with the price of bitcoin plunging 30% to about $30,000 at one point before recovering to the $40,000 level.

After bitcoin's recent plunge and subsequent partial recovery, analysts at Societe Generale argued in a recent note that questions remain around the cryptocurrency's place in investment portfolios.

"It comes as no surprise that the place of Bitcoin in any investment portfolio remains highly contested, precisely because of its erratic price movements," Societe Generale's Alain Bokobza and Arthur Van Slooten wrote in a Thursday note.

On Wednesday, bitcoin dived 30% to nearly $30,000 at one point, before paring some of those losses. Other cryptocurrencies were not spared as the overall value of the crypto market dropped by hundreds of billions of dollars in a single day. Bitcoin later recovered to hover around the $40,000 level on Thursday.

Bokobza and Van Slooten argued that the risks to bitcoin "remain on the downside," citing factors such as potential regulation ahead, which the two characterized as the "biggest threat" looming for the cryptocurrency.

The U.S. Treasury Department on Thursday announced that it's taking steps to regulate cryptocurrency markets and transactions. China has already been cracking down on the sector since 2017.

The analysts also noted the influence of "confusing" communications from electric vehicle maker Tesla. The company previously said it would accept bitcoin as a form of payment for its cars before CEO Elon Musk tweeted last week that the firm has "suspended" vehicle purchases with the cryptocurrency over environmental concerns.

Gold: The better portfolio stabilizer

The analysts also questioned the comparisons often made between gold and bitcoin due to the gap in volatility as well as magnitude of their price movements. Some investors have argued that the cryptocurrency is a potential competitor to gold as a store of value.

Since the start of the year, spot gold has fallen about 1.2%. In a similar period, bitcoin is still up around 38% despite its recent drop.

"We agreed that investors perceive both as offering protection (or at least alternatives) against official central bank money, the value of which is being undermined by unprecedented monetary and fiscal stimulus," Bokobza and Van Slooten said.

Authorities in 2020 injected record liquidity into economies globally as a means of keeping financial markets afloat as the world fought to limit the damage wrought by the Covid pandemic.

But without generating any yield on their own, "the only potential reward to investors in Bitcoin and gold is from their positive price movement, which is essentially the only thing they have in common, apart from their ability to trigger rush buying," the analysts said.

For its part, Societe Generale currently assigns a 5% direct weighting to gold in its multi-asset portfolio as a stabilizer.

In the case of rising inflation, gold can "partially offset capital losses on bonds," the analysts said. Furthermore, gold also has a "protective role in partially offsetting losses" on stocks in the events of either runaway inflation or a return to deflation.

"History shows that over time the price of gold closely tracks real bond yields," the analysts said. "Also, the price ratio of copper (the most cyclical metal) to gold (the most defensive) has proved a neat model for anticipating higher US Treasury yields."