Bitcoin’s Risk-Adjusted Returns Superior To S&P 500 And Gold


Bitcoin has been outperforming gold and the S&P 500 over the last year, according to a recent market analysis. 

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Bitcoin, the world’s most prominent digital currency, has produced more robust risk-adjusted returns over the last year than rival gold or the benchmark S&P 500 index, according to data provided by market research firm TradeBlock.

To arrive at this conclusion, TradeBlock leveraged the Sortino Ratio, which is similar to the Sharpe Ratio but penalizes only downside volatility when calculating risk-adjusted returns.

The Sortino Ratio measures an asset’s gains, relative to the upside volatility that it experiences.

TradeBlock looked at risk-adjusted returns since some assets generate very compelling returns, but also suffer significant price fluctuations.

[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.] 

Research Methodology

For this particular analysis, the market research firm specifically looked at the period between August 13, 2018, and August 9, 2019, sourcing data on bitcoin, S&P 500 and gold from TradeBlock.com, Yahoo! Finance and GoldPrice.org, respectively. 

By examining this information, TradeBlock determined that bitcoin had a Sortino Ratio of 1.97 during the period, while gold stood at 1.06 and the S&P 500 at 0.25.

Interestingly enough, this analysis also looked at digital currency ether, which had a ratio of 0.45.

Several analysts weighed in on TradeBlock’s methodology, specifically its decision to leverage the Sortino Ratio in its calculations.

Sortino Ratio

“Given Bitcoin’s parabolic rises in the past, it’s easy to see why one might prefer to use the Sortino ratio, as the Sharpe ratio inherently biases against extremely positive returns,” said Yazan Barghuthi, founder and CEO of blockchain firm Jibrel.

Evan Kuo, CEO and cofounder of digital currency firm Ampleforth, also offered his point of view.

“The Sortino ratio views upside volatility as a good thing, and only tries to limit downside co-variance, which makes good sense in the case of a highly volatile asset like Bitcoin,” he emphasized.

“In a way the Sortino ratio exposes a more nuanced use-case for Bitcoin in the context of a portfolio. The key is identifying assets that might have high upside potential amidst a macro-economic slowdown.”

More than one expert emphasized that both of the aforementioned ratios have their place when evaluating risk-adjusted returns.

Both ratios are quite good and both are legitimate,” said Tim Enneking, managing director of Digital Capital Management

“The Sharpe Ratio is a bit more commonly used, however.” 

Paul Daniel, head of global sales at Boomerang Capital Inc., also weighed in.

“Whether you are using the Sharpe Ratio to calculate overall volatility or the Sortino ratio to measure downside volatility, these measurements can be added to your strategy as another means of evaluation,” he stated.

Considerations

While looking at risk-adjusted returns can he highly valuable in evaluating a potential investment, there are several other factors that traders should consider, noted analysts.

Even though bitcoin outperformed gold and the S&P 500 over the last year, according to the aforementioned TradeBlock analysis, the digital currency is still notoriously volatile, experiencing very strong gains in 2017, only to be followed by sharp losses.

Enneking emphasized these sharp price fluctuations, stating that:

“Even if risk-adjusted returns exceed the S&P over a given, select period, in general, the risk is much higher.”

That being said, as I’ve noted frequently before, every portfolio should have a crypto ‘slice,'” meaning that every portfolio should incorporate at least some digital currency. 

Barghuthi provided some closing thoughts on the matter:

I think the key take away from these figures is that bitcoin is gradually earning its place as a sensible risk adjusted investment in both institutional and retail investor portfolios.” 

Disclosure: I own some bitcoin, bitcoin cash and ether. 



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