Substituting Bitcoin For Gold in a Portfolio Can Achieve Higher Risk Adjusted Returns Says Paper

Researchers from Toronto’s York University have concluded that replacing gold with bitcoin in an investment portfolio can lead to higher risk adjusted returns.

Using modern day portfolio theory to weight adjust investment distribution in stocks, bonds, real estate and then gold replaced with bitcoin, the study finds the crypto portfolio has higher returns when adjusting for risk.

“These results are robust to the inclusion of trading costs,” they say. “We find that it is possible for an investor to substitute bitcoin for gold in an investment portfolio and achieve a higher risk adjusted return.”

This is the first study of its kind as far as we are aware, with the study further finding that bitcoin “has very low correlation with the other assets, indicating the possible usefulness of bitcoin in diversifying risk.”

One limitation is the bitcoin price data covers “the period of 4 January 2011 to 31 October 2017.” Thus it might not be very current.

That’s because the data doesn’t cover the stupendous price rise in November-December and then the stupendous price fall for much of this year.

It presumably doesn’t because the study takes some time to be undertaken and for the data to be analyzed, but that might mean it doesn’t account for the considerable volatility since.

This isn’t the first time, however, that bitcoin sees a similar level of volatility, so the results are interesting even though they may need more up to date studies.

One consensus that appears to be arising in the literature is the fact that cryptos tend to not correlate with other assets, making them very useful in a portfolio for diversification purposes.

To make their acquisition easier, a number of entities have applied for bitcoin ETFs so that investors can simply acquire bitcoin stocks, rather than handle the underlying asset themselves.

That would make it a lot easier to include the asset in portfolios for investment purposes, but the Securities and Exchanges Commission (SEC) has not yet given the green light.

American investors, as well as European and others, can now access the Bitcoin ETN which is offered by Fidelity and others.

They convert all the ETN purchases into bitcoin or for the ethereum tracker into eth, according to their prospectus. So it acts very much as an ETF, with the ETN vehicle used presumably only for regulatory purposes.

Institutional investors moreover are moving in, both to directly invest and to provide the infrastructure for others to be able to buy cryptos without necessarily having to hold them.

So it may not be long until the acquisition of cryptos for diversification purposes reaches the same level of convenience as stocks or other assets, including gold.