Schulich research shows bitcoin could replace gold in an investment portfolio

The trading price of bitcoin broke through the $60,000 level several days ago, leading some financial experts to wonder if investors snapping up the digital asset are creating a speculative bubble. But two researchers at York University’s Schulich School of Business say the digital currency is still a good replacement for gold in an investment portfolio.

Novel research conducted in 2018 by Irene Henriques and Perry Sadorsky, Schulich professors of sustainability and economics, examined whether bitcoin – often referred to as “digital gold” – can replace gold in an investment portfolio. Gold is considered a traditional hedge against inflation and a safe-haven investment.

An image of three bitcoins on a laptop keyboard, cryptocurrency

Bitcoin is often referred to as “digital gold”

The research paper titled “Can bitcoin replace gold in an investment portfolio?” was published in the Journal of Risk and Financial Management and examined the impact of introducing bitcoin on investment portfolio characteristics and returns. The researchers compared the economic value of portfolios substituting bitcoin for gold using a variety of statistical models, including GARCH, and a benchmark portfolio that included U.S. equities, U.S. bonds, U.S. real estate, EAFE equities, and gold.

The authors found that portfolios with bitcoin ranked highest according to risk-adjusted measures such as the Sharpe, Sortino, Omega and Information ratios. Based on their research findings, the authors concluded that “bitcoin is a viable new alternative asset class that can profitably diversify risk.”

The researchers believe those findings still hold true today, two-and-a-half years later. In September 2018, when the paper was published, a single bitcoin was worth $6,736.52 USD, the daily transaction volume was 262,591, and the supply of bitcoins on the network was 17.279 million. As of February 2021, a single bitcoin was worth $49,549.35 USD, the daily transaction volume was approximately 277,430, and the supply of bitcoins on the network was 18.642 million.

Over the past weekend, bitcoin broke through the $60,000 level, setting a new all-time high in price and more than doubling in value since the start of the new year. The cryptocurrency was trading at $20,000 less than three months ago.

The Schulich research findings were supported earlier this year by global investment firm JP Morgan, which said it views bitcoin as a rival to gold that is rapidly emerging as a safe-haven asset.

“If investors want bitcoin as an investment asset and don’t want to be bothered going through the process of buying cryptocurrency and acquiring a crypto wallet, they can simply buy a cryptocurrency ETF,” says Henriques. “This is equivalent to people who do not want to hold gold per se but rather a gold ETF, which follows its price across time.”

The Schulich researchers, however, caution that bitcoin is still a speculative investment and should not be the only asset in an individual’s investment portfolio.

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