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Is Bitcoin turning out to be better than Gold?

‘Safe Haven’, ‘Digital Gold’, ’Backup Asset’ are all the adjectives used to describe Bitcoin in 2016. The reason behind these is fairly simple and intuitive. In the face of Geo-Political crises, which led to economic turmoil across the globe, Bitcoin came to the rescue for many investors. Traditionally Gold has been the safe haven for such kind of market turmoil. The primary reasons for it are the scarcity of Gold and its non-correlation with other assets. With the cryptocurrency’s limited supply and ease in transactions, it has literally gained the name and status of ‘Digital Gold’.

Interestingly in ‘2015’ Bitcoin was the best performing asset class that outperformed traditional index funds and complex portfolios. The trend has continued in 2016 and Bitcoin still remains unbeaten when it comes to returns. Infact it has been performing better than Gold, making investors wonder if it can actually replace Gold in their portfolios. Let’s look into the aspects which make Bitcoin better than Gold:

Ease of Transaction:


Major investments in Gold do not actually result in handling of the commodity. Investors generally move the funds invested to reap their profits after a period of time. When it comes to bitcoin, it’s an investment that you can actually transfer, spend and utilize in day to day life thanks to the growing adoption of the currency. The ease with which funds can be moved in and out of the currency has always attracted big time investors for short term hedging. This one advantage Bitcoin has over Gold, Gold cannot be used in day to day life for various transactions directly.

Greater Extent of Non-Correlation:

Non-Correlation with other asset classes is a very important parameter which makes an asset a hedge balancing portfolio diversifier. As scarce and untouchable Gold is, it takes a dive along with other metals when the oil markets are collapsing. Fundamentally that is expected of any commodity as oil prices have a direct bearing on the transportation cost. The cost of a commodity also factors this cost and hence the commodity becomes cheaper when oil prices drop. Bitcoin being a digitally programmed asset, has no direct correlation with any of the physical commodities as the fundamental markets driving the price are totally different. This makes it an ideal hedging component in traditional basket of commodities.

Performance till date:

This year, Bitcoin has beaten Gold by a big margin and is still enjoying a healthy uptrend. While Gold gained 8.73% and outperformed S&P 500 and Twenty-year US Treasury Bonds, it still couldn’t match Bitcoins 100% overshoot.

Fund YTD Performance
SPDR Gold Shares (NYSE:GLD) 8.73%
Bitcoin Investment Trust Shares (OTCQX:GBTC) +107.42
SPDR S&P500 +8.27
iShares 20+ Year Treasury Bond -0.59

With a known 21 million limited supply, perceivably it is being considered further scarcer than Gold and will surely see a significant rise in value in the years to come.

Performance of Bitcoin in Portfolios

Ideal Portfolio Components:

With the introduction of crypto currencies and the evolution of the underlying technology, programmable assets have gained considerable recognition.  Bitcoin is now being used as an integral part of portfolios owing to its unique characteristics.

The most important characteristics of any portfolio component are: non – correlation with other assets and low standard deviation. Bitcoin has shown least correlation with respect to any other asset class past year. Even on volatility front it has proven to be much stable in the recent time.

Frequency histogram of monthly returns of the Bloomberg Bitcoin Index, 1/1/2011-1/29/2016. Source: Bloomberg
Frequency histogram of monthly returns of the Bloomberg Bitcoin Index, 1/1/2011-1/29/2016. Source: Bloomberg

Primarily a portfolio component has to have good returns on investment. Bitcoin has fared fairly well in this respect owing to its growing adoption. Another major factor might be the inflow of funds in the face of global financial crises. Bitcoin’s monthly returns have experienced a much narrower range, evidence that the pronounced swings in bitcoin’s earliest days have begun to dissipate. This should give investors additional comfort when contemplating adding bitcoin to their portfolio.

How Bitcoin fares in Portfolios:

 Illustrated below is the fictitious performance of a sample globally-allocated portfolio of stocks, bonds, commodities, and cash held over a 12-mo investment horizon. In a classic investor’s portfolio, a larger allocation is to stocks and a smaller allocation to cash, the return of this  base portfolio would have been -6.9%. In our low-rate and slow-growth environment, investors have been looking to alternative assets to boost returns. An alternative asset that can be considered is Bitcoin.

Portfolio Bitcoin

Return of sample portfolios with investment horizon of 1/29/2015-1/29/2016. Base portfolio allocation indexed on: 45% S&P 500 Index, 10% MSCI Emerging Market Index, 35% Barclays Capital Bond Global Index, 5% Bloomberg Broad Commodity Index, and 5% 3-mo Treasury Bill Index (proxy for Cash). The Bitcoin-allocated portfolio indexed on 45% S&P 500 Index, 10% MSCI Emerging Markets Index, 35% Barclays Capital Bond Global Index, 2.5% Bloomberg Broad Commodity Index, and 5% 3-mo Treasury Bill Index (proxy for Cash), and 2.5% Bloomberg Bitcoin Index. Source: Bloomberg, Grayscale

Given the low correlation to other assets, and decreasing volatility, investing in bitcoin could help boost gains, while adding minimal risk to one’s overall portfolio. When we reallocate a portion of commodities into bitcoin within the aforementioned base portfolio, the total performance improves by about 2.3%, with the portfolio only returning -4.6%. The portfolio’s risk remains fairly similar as measured by the portfolio’s annual standard deviation. This illustrates the value in adding bitcoin to enhance returns, without necessarily taking on additional risk.

While we are still in the early days of this asset’s journey, the potential upside of Bitcoin is promising. As the technology to accommodate and incorporate this currency develops, we can see better and stable price levels. This disruptive technology can indeed revolutionize the way we look at financial markets and set up a digital economic system.