Gold Vs Bitcoin Investment Analysis

Many believe that Bitcoin could one day achieve the same status as gold. Currently, gold's market capitalization is estimated at $18.4 trillion, while Bitcoin's market cap stands at $1.33 trillion. As both products have become publicly accessible and can now be bought through ETFs, could bitcoin price increase 18x to match golds market cap? Should bitcoin replace gold in a portfolio? In this analysis, we will compare the historical returns of gold and Bitcoin from 2017 to the present to assess the investment potential of each.

Returns:

The bar chart above indicates that buying and holding gold for less than five years has a higher probability of yielding positive returns compared to Bitcoin.

As shown in the graph above, Bitcoin's returns are significantly higher than those of gold. Although the probability of earning a profit on shorter timeframes is lower for Bitcoin, the potential gains are much larger. On average, gold delivers an annual return of 10.74%, while Bitcoin averages 88.50% per year.

However, higher returns typically come with higher risk. Bitcoin's annual return volatility is 158.15%, compared to 12.54% for gold. Assuming a normal distribution of returns, there is a 60% probability that Bitcoin's annual return will range between -69.5% and 246%, while gold's return is likely to fall between -1.8% and 23.28%.

When it comes to seasonality, Bitcoin appears to complement gold in February, a month when gold typically declines while Bitcoin tends to rise. Conversely, gold complements Bitcoin during December and May, as the metal usually performs well when Bitcoin experiences a downturn.

The chart above highlights the five worst drawdowns for gold. During this period, gold's steepest decline was -20.87%, while Bitcoin's worst drawdown was -81.40%. This means that an investment of $10,000 at Bitcoin's peak would have resulted in a loss of $8,100, excluding trading expenses. In terms of recovery, Bitcoin took 1,047 days to bounce back from its largest loss, while gold took 1,212 days. On average, Bitcoin experiences a drawdown of -17% and takes 116 days to recover, whereas gold typically sees a drawdown of -3% and recovers in 59 days.

Risk-Adjusted Returns:

In terms of risk-adjusted returns, gold has an annualized Sharpe ratio of 0.66, compared to 0.34 for Bitcoin. This means that for every 1% of return volatility (risk) taken on by the investor, gold provides a 0.66% excess return, while Bitcoin offers 0.34%.

The chart above shows that gold exhibits positive alpha against Bitcoin most of the time. This means that on average if gold had the same level of risk (beta) as Bitcoin, it would deliver an additional 11.07% annualized return.

Why not own both?

Although Bitcoin is often compared to gold, their returns correlation has never exceeded 30%. This indicates that their returns do not typically move in the same direction, suggesting that the market does not yet view them as fundamentally similar.

The scatter plot above illustrates the efficient frontier for different allocations of Bitcoin and gold in a portfolio, comparing their volatility and returns. Historically, combining both assets in a portfolio has provided diversification benefits, outperforming a strategy of holding only one. The optimal mix for maximizing returns while minimizing risk has been 82% gold and 18% Bitcoin, achieving a Sharpe ratio of around 0.68, with returns above 15% and volatility below 20%.

Conclusion:

Although Bitcoin and gold are often considered similar in terms of fundamentals, their price movements tell a different story. This divergence is actually beneficial, as their historically low correlation allows for the combination of both assets in a portfolio. By doing so, investors can create an investment product with better risk-adjusted returns than holding either asset on its own. In addition, we encourage readers to read the full report below and do their own research before investing into either.

Disclaimer:

The information provided in this analysis is for informational purposes only and does not constitute financial, investment, or trading advice. The opinions expressed here are based on historical data and should not be interpreted as a guarantee of future performance. Investing in cryptocurrencies, commodities, or any other asset involves risks, including the potential loss of principal. Before making any investment decisions, you should conduct your own research and seek advice from a qualified financial advisor. We do not accept liability for any loss or damage incurred as a result of reliance on the information contained in this analysis.