Is Bitcoin the better gold?

There are often quite controversial discussions about investing in Gold vs. Bitcoin, which in some cases lead to very polarizing statements. We do not want to engage in this debate, instead we would like to ask the question if - from a quantitative perspective - investing in Bitcoin could be an alternative to a gold investment or at least add value to an existing gold exposure.

Comparing the performance of gold and Bitcoin

What we can immediately see, is that Bitcoin is in a completely different return/risk dimension. Especially, when considering the drawdown development, we can conclude that a plain 1:1 comparison does not make any sense at all.

Creating a level playing field

So in order to make Bitcoin and gold comparable, we have to deleverage Bitcoin in order to align the volatility of both assets (in this case by a factor of ~6). Now, these are far more comparable than before, even from a drawdown perspective!

Notable: From an annualized return perspective, the deleveraged Bitcoin provides approx. 2.4 times higher returns with similar volatility, thus a much higher Sharpe Ratio.

Combining gold and deleveraged Bitcoin

As we can observe, the correlation betwen gold and deleveraged Bitcoin is very low, which may suggest that a combination of both assets could generate some added value? Let's see if this is the case:

An equally weighted portfolio of gold and deleveraged Bitcoin significantly reduces volatility and drawdowns in comparison to each individual asset!

Conclusion

Adding Bitcoin could signifcantly improve Sharpe Ratio and performance of a pure gold exposure, in addition, drawdowns could be further reduced.

So of-course, every investor has to made his own assessment about how to manage his portfolio, but from a pure quantitative perspective, there is no doubt that Bitcoin has some attractive statistical properties if adjusted (deleveraged) properly.

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Disclaimer

This publication has only educational purposes!

While the publisher and the authors have used their best efforts in preparing this publication, they make no representations or warranties with respect to the accuracy or completeness of the contents of this publication and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose.

Even though some instruments show more or less favorable properties, no explicit investment advice is made nor suggested. The assessment contained herein may not be suitable for your situation.