Why a 4:1 Gold-to-Bitcoin Investment Mix May Offer Balanced Risk and Return

Bitcoin’s recent climb past the $100,000 threshold is drawing attention for more than just the price tag.

Bitcoin's recent surge past the $100,000 mark has not only piqued the interest of financial institutions but has also led to some interesting observations from renowned economists.

Among them is Jurrien Timmer, Global Macro Director at Fidelity, who noted the closing gap in the risk-adjusted performance of Bitcoin and gold.

According to Timmer, the 52-week Sharpe ratios for both assets are now converging. This observation becomes especially pertinent considering that gold, which has seen 67 record highs since early 2024 and a roughly 33% return this year, has seen its edge in performance and predictability diminish as Bitcoin recovers.

At current price levels – with gold around $3,213 per ounce and Bitcoin close to $103,600 – Timmer's preferred portfolio balance of 4:1 in favor of gold appears to yield similar volatility and cumulative returns. This heuristic supports the notion that gold and Bitcoin are not necessarily competitive but rather complementary in a diversified store-of-value strategy.

This observation is interesting in the context of the narrative that younger generations are pivoting away from traditional assets like gold and instead putting their faith in newer technologies and assets, such as Bitcoin.

However, at least in terms of Sharpe ratios, which measure risk-adjusted return, both assets appear to be performing similarly over the past 52 weeks. This convergence might signal that as gold's Sharpe ratio deteriorates due to decreasing returns and increasing volatility, perhaps due to the rapid pace of the bull market in 2024, and Bitcoin's Sharpe ratio improves as it recovers from spring lows and shows resilience, there is a meeting point.

Specifically, after reaching a low point in April when it fell below $76,000, Bitcoin has bounced back, recovering almost 25% from those lows.

This recovery could be viewed as a return to its role as a speculative complement, especially considering gold's performance is slowing down.

This observation could also be linked to the narrative that younger generations are pivoting away from traditional assets and putting their faith in newer technologies and assets.

However, it's important to note that Bitcoin's Sharpe ratio is still in negative territory, which could be concerning for some investors. Moreover, external risks, such as regulatory crackdowns or liquidity stress, could reopen the divergence between the two assets.

Despite this, the data suggests that the "digital gold" narrative might be regaining strength as both assets appear to be performing similarly in terms of risk-adjusted return over the past year.