Bitcoin has had an annualized return of 100% in the last eight years. Ecoinometrics maintains that S&P 500 and gold have had returns of 9% and -1%, in contrast to Bitcoin.
Ecoinometrics concludes in its latest newsletter that returns improve by including Bitcoin (BTC) in a traditional investment portfolio. They analyze the impact of the cryptocurrency on a portfolio with various percentages of S&P 500 index assets and gold.
The firm does not include bonds in the portfolio analysis but limits itself to varying the percentages of Bitcoin, S&P 500, and gold. They work with the annualized returns on those assets in the last eight years. They then calculate the annualized return on the portfolio in each of the scenarios.
Portfolios with a Single Asset
The first three cases of the analysis correspond to each of the above-mentioned assets, separately. The annualized return on a portfolio with 100% of Bitcoin, 0% of S&P 500, and 0% of gold, in the mentioned period, is 100%. The biggest drop for Bitcoin in the period is 89% and the Sortino ratio is 1.26.
The annualized return on a portfolio with 0% of Bitcoin, 100% of S&P 500, and 0% of gold is 9%. The largest drop is 37% and the Sortino ratio is 0.28. “This does not look very good compared to BTC,” according to the study.
The third scenario shows a portfolio with 100% of gold, which has the worst return (-1%), compared to the first two. The biggest drop in the period is 42% and the Sortino ratio is 0. “Unless we have predicted the minimum, it is not advisable to hold only gold,” says Ecoinometrics.
Impact of Bitcoin on Returns
The inconvenience of integrating a portfolio with only gold leads Ecoinometrics to test the combination of 50% of S&P 500 and 50% of gold. The annualized return is 4%, the biggest drop is 23% and the Sortino ratio is 0.27.
Next, they analyze a scenario without gold and assign 50% to Bitcoin and 50% to S&P 500, improving the return to 63%. Ecoinometrics highlights that adding the shares to Bitcoin significantly reduces the largest drop, which goes from 89% to 58%. Concerning the Sortino ratio, which is 1.29, it is very close to the 1.26 value of the portfolio with only Bitcoin.
Ecoinometrics also tests portfolio performance without S&P, assigning 50% to both Bitcoin and gold. Overall portfolio performance drops a bit, but Econometrics finds it acceptable. The return is 56%, the largest drop is 64% and the Sortino ratio is 1.6.
The tests reveal that the returns on portfolios with two assets offer advantages, compared to portfolios with a single asset, according to Ecoinometrics.
Combination of the Three Assets
They include a case of more balanced participation of the three assets, with about one third for each. Finally, they test a scenario with a lower share of Bitcoin.
A portfolio with 34% of Bitcoin, 33% of S&P 500, and 33% of gold has an annualized return of 43%. The biggest fall in the period is 45% and the Sortino ratio is 1.21. According to Ecoinometrics, by adding gold and stocks to Bitcoin, the maximum drop decreases even more.
In the last scenario, they reduce the percentage of Bitcoin to 25% and assign 70% to S&P 500 and 5% to gold. The return falls to 37%, regarding the balanced case, and the largest fall also decreases to 37%. However, the Sortino ratio drops to 1.07, which implies a lower overall performance, compared to the previous case.
Previous studies have included simulations with Bitcoin percentages below 10%. A study that Fidelity Digital Assets conducted in 2020 included 1%, 2%, and 3% Bitcoin, with historical data from the previous 5 years. These simulations revealed significant increases in returns on portfolios with some percentage of Bitcoin.
By Alexander Salazar
