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The case for bitcoin: investment comparison of absolute and risk adjusted returns

We compared various model investment portfolios over the past yearly period. Our analysis compares traditional investment portfolios consisting of 60% equities and 40% bonds to portfolios containing a modest allocation to ‘hard-money’ assets, including bitcoin and gold.

Our findings indicate that a modest allocation to bitcoin over different periods would have increased a traditional investment portfolio’s returns. Additionally, a modest bitcoin allocation would have also generated greater risk-adjusted returns as measured by the Sharpe ratio.


Last month Paul Tudor Jones announced in a research note that his firm’s BVI fund initiated a low single digit percentage allocation to bitcoin, through the purchase of cash settled futures contracts. As reported by Bloomberg, Jones was motivated to take a position in bitcoin after considering the implications of unprecedented bond-buying and fiscal spending by global central banks in recent months.

While many venture and Silicon Valley funds have maintained positions in bitcoin and other digital currencies for several years, large money managers have shied away from the nascent asset class until recently. As central banks ramp up asset purchasing efforts, ‘hard-money’ inflation hedges are seeing renewed interest. The most liquid ‘hard-money’ assets today are gold and bitcoin.

In the figure below, we diagram the US federal reserve balance sheet over time. Since 2008, the Fed has ramped up its asset purchasing programs considerably. After seeing a reduction initiated in 2017, asset buying accelerated dramatically in recent months on the back of economic fall-out caused by COVID-19.

Figure 1: US federal reserve balance sheet over time

Data for chart sourced from St Louis Federal Reserve


Asset performance during COVID-19

US equities, bitcoin, gold, and bonds all saw accelerated declines as COVID-19 spread throughout the world in March 2020. While bitcoin experienced significant losses initially, the asset staged a strong rally since–recovering its losses. Gold similarly, after initially declining as investors fled to cash, rebounded to reclaim its safe haven status in the weeks that followed. In the figure below, we diagram the performance of US equities, bonds, gold, and bitcoin year-to-date (YTD).

Figure 2: Asset performance YTD

Data for chart sourced from TradeBlock and the Wall Street Journal


Portfolio comparison: Absolute returns

In the figure below we breakdown asset compositions across three different sample investment portfolios that we analyzed: Sample Portfolio A, Sample Portfolio B, and Sample Portfolio C. Equity allocation represents exposure to the large cap US equity index, S&P 500; bond allocation represents exposure to the AGG bond index; gold allocation represents exposure to the GLD ETF; bitcoin allocation represents exposure to the TradeBlock XBX bitcoin index.

Figure 3: Sample portfolio compositions

Data for chart sourced from TradeBlock and the Wall Street Journal


We assumed an investment of $1000 that re-balanced according to the above weights just once upon inception of each sample portfolio. In the figure below, we visualize portfolio performance over the past one year period.

Figure 4: Sample portfolio performance over past year

Data for chart sourced from TradeBlock and the Wall Street Journal


Portfolio comparison: Risk adjusted returns

In addition to analyzing absolute returns, we also compared risk adjusted returns across the three sample portfolios identified in Figure 3 above. Risk adjusted returns are necessary to analyze as investors identify the attractiveness of returns based on the unit of risk undertaken to generate those returns.

The most often utilized risk adjusted return metric in the financial markets is the Sharpe ratio. The Sharpe ratio demonstrates the average portfolio return earned, over a given period of time, in excess of the risk-free rate per unit of price volatility. Short term US government bond yields are usually used as the risk-free rate and in our calculations we used yields on the 2-year treasury.

We compared sharpe ratios over the past one year period between our three sample portfolios: Portfolio A, Portfolio B, and Portfolio C. The sharpe ratios calculated are 0.259, 0.276, and 0.608 respectively. Portfolio C, the portfolio containing a 10% allocation to bitcoin, had the highest sharpe ratio. The higher the sharpe ratio, the better the risk-adjusted returns of the portfolio. As such, our analysis highlights how adding a modest allocation of bitcoin to a traditional investment portfolio not only generated higher absolute returns but also generated higher risk adjusted returns as well.

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