Bitcoin vs Gold: A Quantitative Analysis Of Risk/Reward

Bitcoin has often been compared to gold since they share many characteristics with one another.

For instance, they are both scarce, have few intrinsic use cases, and have value even though neither one produces cash flows. As such, both Bitcoin and gold are often seen as store of value assets that are useful in protecting investors against inflation, geopolitical instability, and economic turmoil. The current macroeconomic climate - defined by unprecedented monetary and fiscal policy in response to the COVID-19 economic shutdown - has brought inflation hedged assets to the attention of investors who are looking to protect their portfolio from the unsustainable policy actions taken by central banks and governments around the world. Current market conditions have paved the way for gold and Bitcoin to affirm their positions as safe haven assets during these extraordinary times.

The Case For Gold

The appeal of gold as one of the oldest forms of medium of exchange and store of value is largely due to its unique properties. The asset is scarce, has a liquid global market, and is difficult to counterfeit - allowing it to become a safe haven asset and a stable store of value against fiat currency devaluation. Over many decades, these characteristics have allowed gold to retain its purchasing power with relatively low volatility.

Even in recent months, investors have turned to gold as a hedge during these uncertain times. Since the beginning of the year, the Federal Reserve and other central banks have undertaken monetary and fiscal policy at the greatest pace ever witnessed in modern history. The trillions of dollars being printed by these central banks will cause many different assets to rise in price. More specifically, the excessive printing of money should lead to an increase in the price of fixed-supply assets like gold. The extremely accommodative policy action that we have seen in recent months is bullish for gold as investors seek alternatives to store their wealth. Gold has performed well as a safe haven asset and this is expected to continue as the risk of monetary debasement increases.

In addition to the unprecedented levels of quantitative easing, central banks from various countries are debating or have already implemented negative interest rates. Negative rates can be seen as a form of extremely loose monetary policy that could eventually lead to higher inflation. This could act as yet another catalyst for inflation hedged assets. Furthermore, as interest rates go down, the opportunity cost of owning non-yielding assets like gold decreases. Traditional store of value assets tend to perform well whenever interest rates drop and we have seen that happen in recent months.

In fact, current market conditions favor rising gold prices. Inflationary concerns caused by unlimited QE and zero or negative interest rates have created an ideal setting for a store of value asset like gold to flourish. This has happened in the past and it appears that history may once again be repeating itself. Following the 2008 financial crisis, the Fed embarked on its mission of propping up the economy through QE. Gold prices rose over 180% over the following three years before reaching an all-time high of over $1,900/oz. A similar thing happened in the 1970’s following excessive money printing that led to runaway inflation. Coupled with some other factors, the flight from dollars into inflation hedged assets drove gold up from $35 in 1971 to a high of $850 in 1980. Historically, gold has performed well when other markets and currencies begin to weaken and this has held true in 2020 with gold up 14% YTD (up to June 1, 2020) compared to the S&P 500 being down 5.4%.

How Does Bitcoin Stack Up vs Gold?

Nearly every point that was made in the prior section regarding gold can be applicable to Bitcoin as well. The narrative of Bitcoin being digital gold has garnered more attention as its correlation to gold has risen in recent years. The conditions that have propelled gold in the past can certainly apply to Bitcoin in today’s environment. As a matter of fact, Bitcoin is up 32% YTD compared to gold being up 14% during these tumultuous times. Despite having existed for barely over a decade, Bitcoin has held its own compared to gold in these uncertain and volatile market conditions.

Over a longer period, how has Bitcoin and gold performed compared to one another? Our analysis looks at performance metrics between December 31, 2013 and June 1, 2020. The first 3 - 4 years of Bitcoin’s price history was removed as the asset was unproven and had limited liquidity. If we had included this period into our analysis, the results for Bitcoin would be even more spectacular since the asset was up over 1,500,000% between 2010 - 2013.

From December 31, 2013 - June 1, 2020, gold had a cumulative return of 44.4% and an annualized return of 6%. These are solid performance metrics for a store of value asset. That is, until you compare the results to Bitcoin. During the same period, Bitcoin had a cumulative return of 1,279% and an annualized return of 51.4%. Although Bitcoin’s volatility was much higher than gold’s (76.3% vs 13.5%), its annualized Sharpe ratio of 0.92 was 91% higher (vs 0.48 for gold) - indicating significantly better risk adjusted returns.

Bitcoin vs Gold Performance Metrics (Dec 31, 2013 - Jun 1, 2020)

Bitcoin vs Gold Cumulative Returns (Dec 31, 2013 - Jun 1, 2020)

We also looked at rolling period analyses during the same time period in order to remove any bias from choosing specific time frames that would skew the results in a certain direction. Once again Bitcoin significantly outperformed gold on both an outright and risk-adjusted basis in each of the one, two and three year rolling periods.

Bitcoin vs Gold Rolling Period Performance Metrics (Dec 31, 2013 - Jun 1, 2020)

1 Year Rolling Returns (Dec 31, 2013 - Jun 1, 2020)

2 Year Rolling Returns (Dec 31, 2013 - Jun 1, 2020)

3 Year Rolling Returns (Dec 31, 2013 - Jun 1, 2020)

The daily return volatilities show that Bitcoin has been much more volatile than gold on a 1 month rolling and 1 year rolling basis. However, the charts of the one, two and three year rolling Sharpe ratio show that Bitcoin’s Sharpe ratio is higher than gold’s for the large majority of each specific time period. This essentially indicates that although Bitcoin’s volatility is higher, the outsized returns make it a better investment than gold on a risk adjusted basis for most periods since the end of 2013.

Daily Return Volatility: 1 Month Rolling Standard Deviation

Daily Return Volatility: 1 Year Rolling Standard Deviation

1 Year Rolling Sharpe Ratio

2 Year Rolling Sharpe Ratio

3 Year Rolling Sharpe Ratio

Despite their similarities, the analyses show that Bitcoin has significantly outperformed gold for a large majority of time periods since 2013 when compared on a quantitative basis. On top of that, with Bitcoin’s market capitalization sitting at approximately 2% of the total value of above-ground gold, the risk-reward ratio continues to favor Bitcoin as an attractive emerging store of value asset. The results from our analyses indicate that in addition to owning gold, it may be prudent for investors to allocate a portion of their safe haven assets into Bitcoin.


Current market conditions defined by unlimited QE, inflationary fears, and a weakened global economy should be supportive for store of value assets such as gold and Bitcoin. Gold has passed the test of time as it has been used as a medium of exchange and store of value for many centuries. Bitcoin, on the other hand, is barely a decade old but has developed into perhaps a digital version of gold with its own unique properties and significant long term potential. Both assets have performed well during the coronavirus pandemic and have staked their claim as the ultimate hedge against macroeconomic uncertainty.

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