This is not just because bitcoin is a “speculative asset” and it is living in a “bubble”. It’s been more than a decade since its inception and it has outperformed and consistently provided better returns. Coinshares’ recent report on portfolio diversification using bitcoin has shed new light on an already known fact.
In the report, Coinshares compares the data for bitcoin starting 2015 with other indices/assets. To no one’s shock, bitcoin has outperformed SOCL [the social network index], gold, and even the CRB index.
For this experiment, Coinshares created a “traditional balanced portfolio with 60% equities and 40% bonds and then added a modest amount of bitcoin, detracting from both equities and bonds equally”. After allocation 4% of the portfolio to bitcoin, these are the results
- Returns: Portfolio with 4% Bitcoin had the highest return of 18.8% while the portfolio with 4% gold has half of bitcoin’s return – 9.6%. SOCL had 10.1% return and CRB at 9.0%. Clearly, apart from bitcoin, only SOCL had returns in the double digits.
- Sharpe Ratio: Again, the portfolio with 4% bitcoin allocation had twice the Sharpe ratio in comparison to other indices/assets. The portfolio with CRB had a negative Sharpe ratio. Even though bitcoin is termed as a risk asset with massive volatility, risk-adjusted returns for it are higher than most.
- Drawdown: Although this metric should be low for a sound investment, it is on the higher end of the spectrum for bitcoin. Drawdown refers to the distance an asset has dipped from its peak. Bitcoin’s pumps are on higher levels but so are its drawdown. Bitcoin had a maximum drawdown of 18.1%, while every other portfolio had a 16-17% drawdown.
If an asset that experienced a 50% drop in its price less than 7 months ago has a higher return for the last 15 years, it surely must be a good diversification asset. Besides, even VanEck came to the same conclusion about bitcoin helping diversification of portfolios.