Bitcoin and gold are likely to be frequent tools used by investors to hedge against inflation today, but they can be compared to two distinct players on the same squad, according to Jurrien Timmer, Fidelity Investments’ Director of Global Macro.
According to Timmer, the current Bitcoin price bubbles are quite comparable to the gold price booms of the 1970s. The main difference is that gold price bubbles were smaller in the 1970s than they are now because inflation was considerably lower.
When comparing annual volatility with monthly returns for both, Bitcoin clearly outperforms gold, he claims. The risk versus return graphic illustrates that Bitcoin generates almost 10 million more returns than gold, but Bitcoin is definitely the riskier of the two.
Bitcoin has a high volatility score of 42.3 when compared to other assets, such as oil (16.8), US stocks (7.79), and gold (4.2). This is when all assets’ volatility is calculated over a three-day period. Since 2014, however, Bitcoin has outperformed all other assets in terms of risk-adjusted returns.
For example, Bitcoin’s risk-adjusted return is currently 2.39, compared to 1.44 for gold and 1.7 for US stocks. Since 2014, Bitcoin has outperformed US bonds and real estate in terms of risk-adjusted returns. Woobull calculates an asset’s risk-adjusted return over a four-year period.
“Despite all of the controversy surrounding bitcoin, one thing that hasn’t altered is its lack of association with other asset classes,” Timmer added.
Timmer thinks it’s uncertain whether Bitcoin is still lucrative when compared against daily returns from the S&P 500 index, Barclays Aggregate, and gold. However, comparing daily returns is not a useful way to compare the performance of one asset to another. Timmer also believes that gold and silver prices will rise significantly in the future if TIPS break-evens catch up to the Consumer Price Index and the Fed continues to suppress nominal rates, resulting in negative real rates.