BTC Should Be in Your Portfolio: A Comparison of Bitcoin, Gold and ETFs

When it comes to Bitcoin or its price, interested readers will find thousands of articles on the Internet. The range here extends from apocalyptic scenarios to extremely positive forecasts. On the one hand, it underlines the volatility and the unpredictable nature of the digital currency. On the other hand, the range shows that, while it is easy to obtain information in the digital age, it is all the more difficult to find high-quality information. Neutral and objective considerations are rare, as self-interest often accompanies the valuation of an asset.

With this article, we would like to create a solid basis in which Bitcoin is viewed objectively. It is therefore about no more and no less than the question of how well Bitcoin is actually suitable as an investment object and asset.

Objective: How good is Bitcoin as an investment object?

The goal of this article is to perform an analysis of the most popular crypto currency. Elements of financial mathematics are used for this. The results of the analysis are presented graphically and are shown and interpreted in the context of the article.

Main keywords in this article here are correlation, volatility, Sharpe ratio and allocation. If you are unsure about the meaning of these terms, we recommend that you read the source article and translate it via google translator in english.

Below you will also see a simple tabular representation of what you can expect from this article and which questions are answered. We will also show you which questions - at least in this article - we do not answer.

WHAT YOU CAN EXPECT IN THE ARTICLE

• Was Bitcoin a good investment in the past?
• How has Bitcoin performed compared to other asset classes and financial products?
• Is it true that Bitcoin is an uncorrelated asset?
• Does Bitcoin - from a financial perspective - have similar characteristics to gold?
• Does it make sense to hold Bitcoin as part of a diversified portfolio?
• s it worth the risk of investing in BTC?
• How much does the crypto currency fluctuate compared to other financial products?

WHAT YOU CANNOT EXPECT

• Can I become a millionaire with Bitcoin?
• What is the Bitcoin rate 2021 and 2022?
• What is Bitcoin's potential for the future?
• Can BTC replace national currencies in the future?

Structure and methodology of the article

We start with the chapter on terminology. Then we enter into the analysis and look at the results. At the end we discuss the insights gained and what significance they have for us. One question that we have not yet clarified is the question of the time frame and the financial products and asset classes we are comparing.

Period and choice of asset classes

Our analysis looks at the period from 01.01.2016 to 01.06.2020. We have therefore chosen an approximate time span of 4.5 years. We have explicitly excluded the period from 2013 to 2016, as the market capitalization of Bitcoin was still largely in the single-digit billion range. The daily trading volume was also very low compared to today. This has a direct impact on volatility and other factors. In order to achieve the best possible significance, we have therefore chosen 01.01.2016 as the starting date.

We have chosen the following two asset classes as comparison objects: precious metals and (passive) index funds. We have thus explicitly excluded bonds and equities. We have primarily excluded bonds because there are only a few investors and investors who still rely on this asset at the present time.

While in Europe government bonds (with the exception of countries such as Greece) have hardly been yielding any returns for several years now, investors with US government bonds have at least been able to achieve a return close to inflation. Since the interest rate adjustments there, however, these times are also over. We have therefore refrained from investing in equities, as the incredibly large selection of individual stocks makes it difficult to find good objects of comparison.

The concrete objects of comparison in detail

In our opinion, we have therefore placed more emphasis on the aspects of relevance and dissemination in the population. A study by the Association of German Banks from 2019 shows that the majority of Germans invest in fund units and/or use a savings plan for this purpose.

This survey shows the Germans' most popular investment products in 2019. source. statista.de

Exactly for this reason we have chosen passive index funds, so-called ETFs, as comparison objects. These are not only popular, but are largely served with monthly savings plans. Many investors and private investors also use ETFs as a retirement provision and long-term investment. As a representative of passive index funds, we have chosen the iShares products of the Blackrock company. These not only rank among the largest index funds by volume in their segment, but are often the first choice for private investors.

Specifically, we have chosen the three ETFs iShares Core MSCI World UCITS ETF (WKN:A0RPWH), iShares Core S&P 500 UCITS ETF USD (ISIN:IE0031442068) and the iShares Core DAX® UCITS ETF (ISIN:DE0005933931).

In the precious metals sector, we have taken the gold price (in USD) as our reference value. For many investors, gold is still considered a hedge in their portfolio. In addition, the frequent comparison between Bitcoin and gold has led us to include the most popular precious metal in our analysis.

The basic information should now be clear. It became clear what the aim of the article is and the questions and aspects it addresses.

Bitcoin as an Investment Object: The Analysis

We have now arrived at the heart of this Bitcoin analysis. In the following, we will first address the crypto currency number 1 in isolation. We will then look at BTC as part of a diversified investment strategy. In addition we look at the annualized returns of Bitcoin compared to our 4 reference products. In addition to the returns we take a look at the volatilities and the Sharpe ratio. Furthermore, we show the correlation between BTC and classic asset classes. Finally, we want to take a look at the optimal portfolio and understand if and how Bitcoin can improve the performance of a portfolio.

Performance of the crypto currency at a glance

We start with the overall performance of Bitcoin. For this purpose, we would first like to give you, the reader, an overview of how a theoretical investment of 10,000 US dollars would have developed by January 1, 2020. To show that the performance is less meaningful for self-selected periods of time, we will look at different data. Then we look at the absolute performance and the percentage development. At the end of this section we compare the percentage development of Bitcoin with that of our 4 reference products.

Absolute performance of Bitcoin at a glance: Developments up to 01.01.2020

Specifically, we choose 01.01.2016, 01.01.2017, 01.01.2018 and 01.01.2019 as the starting points for an investment of 10,000 US-Dollars.

The chart above clearly shows that the absolute performance of an investment in Bitcoin is clearly dependent on the time of entry. For example, an investment of USD 10,000 on January 1, 2016 would have developed into a sum of USD 167,000 by June 1, 2020. An investment on 01.01.2018, on the other hand, would have been just 5,100 USD. The enormous fluctuation range of an investment in Bitcoin is just as clear. In the course of this article, we will take another look at the volatility in detail. As a reader, however, you should already get a feeling for the massive variations in the value and price of Bitcoin.

The course of the investment from January 1, 2016 to June 1, 2020 shows this impressively: The sum of your investment would have increased from 22,438 USD within one year from January 1, 2017 to an enormous 327,600 USD. In the following year (01.01.2019) this sum would have collapsed again massively and would have been 86,900 dollars.

Relative performance of BTC in the overview

To supplement the presentation of the absolute figures, the following graph shows the resulting performance in percent.

At this point one could now sing the praises of the performance of the largest crypto currency. 1570% increase in value in less than 5 years - such titles would most likely be suitable to arouse the interest of many potential readers. However, we refrain from doing so, since - as already mentioned - a consideration of the performance, whether in percentage or absolute terms, is only conditionally meaningful.

After all, the choice always depends on the chosen period and thus massively on the timing of the investment. The second point is that such a statement should at best be considered in context. This means for us that we now want to compare these percentage figures with those of our four reference products. Added to this is the need to put the return in relation to volatility, i.e. the risk taken.

Before a misunderstanding arises here: There is no question - the performance of Bitcoin is more than impressive and the returns are (as we will see in a moment) unique. However, since the goal of this article is more than canonization of Bitcoin, we would like to draw attention to these points to be criticized.

Performance comparison: Bitcoin vs. Gold, iShares Core MSCI, iShares Core S&P500 and iShares Core DAX

So let's focus on the performance of our 4 reference products: iShares Core MSCI, iShares Core S&P500, iShares Core DAX and the precious metal gold. How high were their percentage returns in the same reference period?

From the above diagram, an obvious picture becomes clear. We would like to summarize the most important findings:

1. The American stock market remains the absolute driving force in terms of returns. The iShares S&P500 can outperform both the more broadly diversified and therefore globally invested iShares MSCI and the iShares DAX.
2. The German stock index has not been able to outperform in recent years. While the stock market has had an unprecedented wedding in recent years, the DAX is the worst performer of our asset classes.
3. The demand for gold in recent years drove the price of the precious metal sharply upwards. As a result, an investment in gold has also yielded a decent return in recent years.
4. Finally, it is worth noting that Bitcoin has outperformed the market in almost all periods. Due to the high volatility, which we will talk about in more detail in a moment, the time of investment as well as the holding period of the crypto currency is crucial.

The current consideration has explicitly referred to the historical development. The end date of our analysis was always January 1, 2020. In the following, we will summarize the time horizon and take a look at the year-to-date performance. This means that we look at how all our assets have performed since January 1, 2020. As this year represents a significant break (keyword: Covid-19), it is particularly interesting to see how asset classes perform in times of economic crisis.

Performance since 01.01.2020: Development in economic crises

The spread of Covid-19 and the resulting drastic measures caused a short-term slump in the global financial and stock markets. Even though the stock market has largely recovered from the lows of the year from today's perspective, the effects of the virus are far from over. It will probably take months and years until consumption and products are at the level of the previous year. Other phenomena, such as increased unemployment in some countries, may have even more lasting consequences.

In this context, it is therefore interesting to know how well the asset classes have recovered and how they compare with the beginning of the year:

The chart above is clear: despite the recent recovery in the equity market, none of our three index funds has been able to fully recover. However, the picture formulated in the previous section is repeated in the sense that the iShares S&P500 is the best performer and the iShares DAX has the highest losses. In the context of the Corona crisis, gold shows its qualities as a safe haven and crisis investment. With a performance of 15.18% in the period from 01.01.2020 to 31.05.2020, the precious metal outperformed the ETFs.

Bitcoin (BTC) is the clear winner of this comparison with a growth of almost 35%.

Annualized return

So far we have looked at how an investment would have developed in 2016, 2017, 2018 and 2019 with the target date of 01.01.2020. Furthermore, we have looked at how our 5 investment opportunities have performed since 01.01.2020. The chapter on performance concludes with a look at the annualized return.

Here we can clearly see that Bitcoin (BTC) has the highest annualized return in our observation period. With regard to our 3 ETFs we see again that the iShares S&P500 has the best annualized return. It is also interesting that the precious metal gold outperformed the iShares Core DAX.

Now that we have gained an impression of the differences in performance, let's take a look at the volatility. Especially in recent years, BTC has been repeatedly accused of being a highly volatile asset.

Let us examine together whether this accusation has a foundation and if so, how strong the differences in volatility actually are. The development so far this year will be particularly interesting. After all, the turbulence surrounding Covid-19 has shown that the stock market has also been much more volatile than in recent years. Daily changes in the high single-digit percentage range up to double-digit percentage changes were observed on the stock market this year.

Volatility and the question of fluctuation: How stable are ETFs compared to Bitcoin and Gold?

It is time to look at the volatility of asset classes and financial products. Looking at volatility is important because inexperienced investors in particular often shy away from asset classes with high volatility. The reason for this is quite understandable. Imagine that an investor with little experience makes an investment of 1,000 USD. In the case of a highly volatile asset, it is quite possible that a glance at the portfolio a few weeks later will only show an amount of USD 800, for example. This may unsettle investors and as a result may even lead to the worst reaction ever:

The fear of "losing" even more money is expressed in a panic sale, which turns the initially theoretical loss into a real loss. While the investor may initially be happy to have got off with a "black eye", he will be annoyed when he looks at the price again 3 months later and realizes that his investment would now be worth USD 1,300.

The message behind this should be the following: Anyone investing in a highly volatile asset must be aware of this fact. Fluctuations are part of this by definition. Short-term, strong movements should therefore not unsettle the investor. At this point, it should also be made very clear that for the reasons just mentioned, highly volatile assets are simply not the right investment for many investors.

Annualized volatilities in comparison: Bitcoin vs. MSCI, Gold and Co.

But let's now turn to the chart showing the annualized volatilities of our 5 investment properties. Accordingly, the chart below shows the annualized volatility for the years 2016, 2017, 2018, 2019 and 2020.

What can we conclude from this graphic? - First of all, it can be said that Bitcoin has a much higher volatility compared to the three ETFs and gold. So the statement that BTC is a highly volatile asset is absolutely correct.

Furthermore, we can say that volatility has increased significantly in 2020. The turbulences on the stock markets are logically reflected in the volatility.

Furthermore, it can be seen that gold - especially this year - once again underlines its role as a crisis-proof investment. With a volatility of around 20%, it is well below that of our 3 ETFs and Bitcoin. For the years 2016 - 2019 it also shows that the volatility of our 3 ETFs was comparable to that of gold.

Now that we have discussed both returns and volatility, it is time to analyze the risk/return ratio. So the key word here is Sharpe ratio.

Sharpe ratio in overview: The relationship between risk and return

As already explained in the introduction to basic knowledge, the Sharpe ratio is a good indicator of the ratio between the return achieved and the risk taken. We have therefore calculated the Sharpe ratio of our 5 asset classes for each year. Let us take a look at the results:

First a note: In 2017, Bitcoin (BTC) has by far the best and highest Sharpe ratio. The value here was 18.98. However, we have deliberately left this value out of the above graph, as it would distort the overall picture and make the display worse.

Let us now look at the figures themselves and look at the two best asset classes for each year:

2016 - 2020: Overview of the best Sharpe ratios

• 2016: Bitcoin has the best Sharpe ratio with a value of 2.26, followed by the iShares S&P500 with a value of 1.42.
• 2017: BTC is in first place with a value of 18.98, followed by the precious metal gold with a value of 1.32.
• 2018: All asset classes show a negative Sharpe ratio. So this year the risk-free investment would have been the better investment. With a value of -0.18, however, the S&P500 would be the winner within the group of losers.
• 2019: The 2019 stock market year went well. We can also see this performance in the Sharpe ratio. The iShares MSCI and iShares S&P500 occupy the first two places.
• 2020: In first place is the precious metal gold with a value of 0.54, followed by Bitcoin with a value of 0.43.

We can therefore state that Bitcoin had twice the best Sharpe ratio in our comparison period. This year, the crypto currency is in second place behind gold.

Interestingly, the precious metal gold comes directly after it. It had the best Sharpe ratio in 2020. In the years 2017 and 2018 it again offered the second best risk/return ratio.

Within the class of ETFs, the iShares S&P500 is again dominant and has the best Sharpe ratio.

Correlation and the question of diversification

Before we turn to the question of all questions ("What does the optimal portfolio look like"), we look at the correlation. Within the framework of portfolio theory, we have learned that it is important to minimize the unsystematic risk by diversifying the portfolio.

To put it a little more clearly: Choose a good combination of different financial products that complement each other well. Make sure to choose different classes of charges invested in different industries worldwide.

To achieve this goal, we should therefore find assets that at best have no correlation. This in turn means that we need a value that is in the range of 0. Depending on the definition, values in the interval [-0.25; 0.25] are considered very weak or non-correlated. Values well above 0.25 increase the cluster risk of a portfolio. Their value development is therefore highly interdependent. Values that lie between -1 and -0.25 are also negative for the development of the portfolio, as the returns cannibalize each other. So while one asset increases, the other decreases.

The correlation of the three ETFs in comparison

Let's start by looking at the correlation of the three ETFs to each other. Here we can already assume that the correlation is high. First of all, all three financial products are passive index funds that track a stock index. On the one hand, the S&P500 share index and on the other hand the DAX. With the MSCI ETF, the development of the largest companies worldwide is mapped; this explicitly includes companies from the S&P500 and the DAX.

Our analysis confirms this assumption for most years. Especially the S&P500 and the DAX show a high correlation. From a purely subjective point of view, this feeling can also be confirmed. If the American stock index is in a bull phase, the German stock index is doing just as well. We can observe the same behavior when the mood on the market turns.

Our analysis also shows that the iShares MSCI correlates less with the iShares S&P500 and the iShares DAX. This lower degree of correlation is mainly due to the fact that the iShares MSCI is invested worldwide and does not only hold positions in companies in the USA or Germany. The markets also include companies from Japan, Great Britain, Canada and Switzerland.

Correlation of gold: The precious metal as a safe haven?

In our analysis we have already seen that gold can play out its strength in some market situations. In turbulent years, the precious metal fluctuates less and even delivers positive returns. Gold is often seen as a safe haven and many investors use the precious metal as an addition to their portfolio.

Let's now look at the figures to see if gold is indeed uncorrelated with the development of our peers and is therefore well suited for diversification:

The clear answer here is: yes, gold is well suited for diversification. As we can see from the figures, the precious metal is largely uncorrelated to ETFs.

Bitcoin and ETFs: How do they correlate?

What is the situation with the crypto currency Bitcoin? Can a behavior similar to that of gold be observed here, or does the crypto-currency often referred to as "digital gold" correlate more with our three ETFs? The answer to this question can be found by looking at the figures:

Again, we can state quite clearly that the development of the Bitcoin price is largely uncorrelated with that of our comparable products. The correlation here oscillates in our time period in the interval of [-0.15; 0.15].

However, one exception is clear: This year in particular, the correlation of Bitcoin with the iShares MSCI increased. The turbulence on the stock market had also hit the crypto currency hard for a short time. A collapse of BTC's share price occurred almost parallel to the decline in the American, German and global stock markets.

However, since 2020 is not yet six months old, it is not yet possible to make a final statement on this snapshot. From a purely historical perspective, Bitcoin is clearly uncorrelated and is therefore a good addition to the portfolio.

Incidentally, the correlation of gold to the iShares MSCI, S&P500 and DAX also increased significantly this year.

Bitcoin and Gold: Correlation

Let us take a brief look at the correlation of Bitcoin with gold. The following graph shows the correlation in the years 2016, 2017, 2018, 2019 and the previous correlation in this year:

The findings on this can be summarized briefly: Gold and Bitcoin have been largely uncorrelated in recent years. In other words, one can say that there was almost no positive correlation. In 2020, the correlation increased to a value of just over 0.30. This means that gold and Bitcoin have a low positive correlation this year.

The optimal portfolio: Bitcoin as yield boost?

Now that we have looked at various key figures in detail, the final question probably arises: How can I use these findings for me to design the optimal portfolio? On the other hand, we can ask ourselves the question whether in the past there was a good combination of the five asset classes shown that optimized its own return with comparatively moderate risk?

To answer these questions, we look at different sample portfolios and how they would have performed in the past years. Since many private investors rely on the iShares Core MSCI as part of their retirement provision and/or investment strategy, we choose its performance as a benchmark. The ETF tracks the performance of the world's major industrialized nations and is therefore a good example of a passive index fund that is broadly diversified and geographically spread.

First of all: there is no such thing as the optimal portfolio. The best possible composition of a portfolio is a highly individual matter. Personal factors (life circumstances, risk tolerance, investment horizon, liquidity, etc.) play a decisive role. However, the following chart shows very well the effect of a diversified portfolio with Bitcoin and/or gold.

From the graphic above you can see a lot of interesting information. Let us go into the details:

Combining individual ETFs is not a good strategy

For example, we can see very clearly here that a "diversification strategy" with several ETFs does not really improve the portfolio. After we have already shown in the previous sections that the correlation within the group of ETFs is very high, we can also see here that a combination of ETFs with each other (columns in orange and gray) cannot beat the iShares Core MSCI as benchmark (light blue column).

Benchmark test with 20% gold as an addition to the portfolio

If we now take a look at the yellow column, we see an interesting picture. An admixture of 20% gold in the portfolio can - especially in weak stock market years - improve the performance of the portfolio. Especially compared to the combination of individual ETFs, the addition of gold performs well. Nevertheless, the addition of gold cannot beat our benchmark in any of the years.

Bitcoin as a supplement to the iShares MSCI

How does the development look now, if one integrates the crypto currency Bitcoin (BTC) to a small portion into the Portfolio. For this we have chosen a share of 20% (blue column) and a share of 10% (green column).

Here we can see that the combination of iShares MSCI and Bitcoin was able to clearly outperform a pure investment in the iShares MSCI due to the good performance of the crypto currency. However, those who would have invested in the combined portfolio at one of the worst possible times (01.01.2018) would have underperformed the benchmark.

The table below shows that our combination of MSCI and BTC would only have had an annualized performance of 5.47% with 20% BTC and 8.98% with 10% BTC. The iShares MSCI would have achieved 12.39%.

iShares MSCI, Bitcoin and Gold as the perfect portfolio?

The last two columns show how a portfolio consisting of the iShares MSCI, Bitcoin and Gold would have performed. We look at a weighting of 80% MSCI, 10% Bitcoin and Gold (dark blue column) and a much more aggressive mix of 50% MSCI, 40% Bitcoin and 10% Gold (brown column).

The aggressive weighting clearly shows that a too large admixture of the crypto currency can have negative consequences for the portfolio and its performance. With good market timing, the aggressive weighting of BTC will generate a very high annualized return. However, if the timing is bad (01.01.2018), this would even be punished with a negative performance.

If you now take a look at the dark blue column, you will see that this is the only portfolio that has outperformed our benchmark every year. The combination of iShares MSCI at 80% and Bitcoin and Gold at 10% each has proven to be the best portfolio in our comparison and in the period we chose.

The portfolio was improved in various aspects: The crypto currency and the precious metal added two assets that are uncorrelated to the iShares MSCI. Through the combination of the value-stable precious metal gold and the yield booster BTC, an outperformance was achieved in all years. The danger of the highly volatile crypto currency BTC was well absorbed by the addition of gold and its low weighting.

Summary and conclusion

At the end of the article we would like to summarize the most important findings and draw a final conclusion. Let's start with the most important findings from this article:

The most important findings of the analysis:

The following 5 points summarize the most important findings of the analysis.

Annualized return

Bitcoin has the highest annualized return in our period under review.

Annualized volatility

The crypto currency also has the highest volatility. Thus Bitcoin fluctuates much more than our 3 ETFs and the precious metal.

Risk-return ratio

The risk/return ratio of BTC is often better than that of traditional assets or the precious metal gold. The risk taken is therefore in an adequate proportion to the return.

Correlation

Like gold, Bitcoin is hardly correlated with the classic financial market. This year, however, there is a tendency towards positive correlation. Whether the trigger for this is the economic turbulence around Covid-19 or other factors behind it cannot be determined at this time.

Bitcoin in the portfolio

In the past, a portfolio that held a small percentage of Bitcoin could achieve an excess return.

Now that we have summarized the most important findings, we would like to address some aspects that private investors may now ask themselves. Before doing so, a few general words about the analysis and the results:

History and future: No forecasts for BTC

Our analysis is a result of the past. All figures mentioned are the result of past developments. Therefore, they should explicitly not be used to predict future trends. Bitcoin is a very young asset compared to the stock market or the precious metal gold. Accordingly, there are still few transparent data sources.

To increase the significance of the data, it would be good if the crypto currency had a longer history. Especially for BTC, there are still many uncertainty factors (e.g. regulation) that could lead to unpredictable events in the price. This in turn would of course affect all parameters mentioned in the article such as yield, volatility, correlation etc. in the future.

However, it became apparent from this analysis that the narrative around Bitcoin is founded as digital gold and uncorrelated asset. It is also clear that BTC has achieved significant outperformance in the past and, in combination with other financial products, has improved its own portfolio.

Previously published at https://bitcoin-2go.de/bitcoin-gold-und-etfs-im-vergleich/