Despite Bitcoin Selloff, Its Generated ‘Superior Returns’ Compared to Traditional Assets During COVID-19


In March, as COVID-19 spread throughout the world, every asset, be it US equities, bitcoin, gold, or bonds, they all accelerated declines. Initially, bitcoin experienced significant losses but only to stage a strong rally of 155%.

Just like bitcoin recovered its losses, gold initially declined as investors fled to cash only to rebound and reclaim its safe-haven status.

Source: TradeBlock

Now, if we compare the performance of three investment portfolios, the one with 60% equity and 40% bonds, the second one comprising 55% equities, 45% bonds, and 10% gold; and the one with the same composition as the previous one but bitcoin replacing gold, the portfolio with the digital asset is the best choice.

With an investment of $1000, even a modest allocation to hard assets provided better returns, and in the case of bitcoin, it triumphed over the other two.

Source: TradeBlock

Moreover, a modest bitcoin allocation would also have generated greater risk-adjusted returns as measured by the Sharpie ratio found TradeBlock. Risk-adjusted returns analyze the attractiveness of returns based on the unit of risk undertaken to generate those returns.

As such, the Sharpe ratio of the three portfolios is calculated at 0.259, 0.276, and the one with the bitcoin having the highest one at 0.608. But still, bitcoin generated more returns than the other two portfolios during the coronavirus pandemic.

During this period, the US Federal Reserve expanded its balance sheet to a new high at over $7 trillion. Fed has been ramping up its asset purchasing programs since 2008 only to reduce it in 2017 but it accelerated dramatically in recent months to prevent the economic fallout triggered by the pandemic.

Meanwhile, the economic downturns saw several large money managers that have been staying away from digital currencies jumping into bitcoin. Just last month, Paul Tudor Jones announced that his firm’s BVI fund has a 1 to 2% allocation to bitcoin through the purchase of cash-settled futures contracts.

The motivation behind this was the implications of unprecedented bond-buying and fiscal spending by global central banks in recent months.

“As central banks ramp up asset purchasing efforts, ‘hard-money’ inflation hedges are seeing renewed interest.”

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