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(Kitco News) – As the debate between traditionalists who prefer gold as the established store of value and the younger investing crowd who see Bitcoin (BTC) as gold 2.0 rages on, some have noted that there is plenty of room for both to exist, and the Vinter ByteTree BOLD1 Index (BOLD) shows that there are profits to be made in the compromise.
The BOLD1 index was designed to take Bitcoin and Gold, the world’s two most liquid alternative assets, and combine them on a risk-adjusted basis. “Due to their natural low correlation, the diversification benefits of holding both assets have been unusually high,” said ByteTree analyst Charlie Morris. “Bitcoin prefers risk-on market conditions, while gold prefers risk-off.”
Morris said BOLD “allocates to Bitcoin and gold on a risk-adjusted basis using past volatility. That is a measure of daily price movement, both up and down. The less volatile asset, which has always been gold, gets a higher weight in the index at the end-of-the-month rebalancing.”
According to the latest monthly BOLD rebalancing report, “BOLD rose by 3.9% in October, taking the return for the year to 34.3% in USD terms. Over the month, Bitcoin rose by 9.0%, Gold rose by 2.7%, while equities rose by 9.7%. It has been a notable time for liquid alternative assets as the US dollar fell by 3%.”
Morris noted that Bitcoin bulls have been emboldened by the approach of the next halving and the pending approval of a spot Bitcoin ETF in the U.S., while gold is looking as strong as ever, trading just below its all-time high.
Bitcoin, gold, and BOLD 1-year performance. Source: ByteTree
To help get a better picture of the BOLD performance, Morris provided the following chart that removes Bitcoin and adds the MSCI World Index and Nasdaq in its place.
Gold vs. BOLD vs. MSCI vs. Nasdaq. Source: ByteTree
“Gold has delivered similar returns to global equities, while BOLD has narrowly beaten the Nasdaq,” he said. “With technology so strong this year, that is an achievement. One noticeable difference has been volatility, where BOLD has 15% and the Nasdaq 24% over the past year.”
BOLD has also outperformed the Nasdaq over the past five years, and “fell less than the Nasdaq in the 2022 bear market, and recovered sooner and stronger,” Morris said. “It is noticeable how BOLD’s drawdowns have repeatedly been less than the stock market. BOLD is a defensive trade.”
BOLD market over five years. Source: ByteTree
Morris noted that “Bitcoin’s volatility has fallen markedly” since 2011, and crypto is now “maturing as an asset class as institutional investors engage in the space.”
Bitcoin and gold past 360-day volatility. Source: ByteTree
As a result of the declining volatility, Bitcoin’s weight in BOLD has increased from 25.1% to 25.3% over the past month. The remaining 74.7% is allocated to gold.
“The current Bitcoin weight is high by historical standards, and has been rising as volatility has been falling,” Morris said. “This is likely to continue as institutional investors embrace Bitcoin. The more weight behind the system, the more market depth there is, and that results in greater stability.”
He said the BOLD strategy manages risk with an inverse volatility weighting methodology and helps to add value over time. “Each month, the rebalancing process sells the stronger asset and reinvests the proceeds into the weaker asset. This buy low, sell high approach accumulates the weaker asset over time.”
Morris said that BOLD has served as “a gold accumulation strategy” since 2018, reducing its Bitcoin by 18% but increasing its gold holdings by 38%.
BOLD rebalancing since 2018. Source: ByteTree
“An investor who put $1,000,000 into BOLD in 2018 would have started with 162 bitcoins and 1,756 ounces of gold,” he said. “By November 2023, that investor now has 134 bitcoins and 2,430 ounces of gold.”
Between the Bitcoin peak in Nov. 2021 and the low in Nov. 2022, the above scenario would have seen BTC holdings increase from 77 BTC to 231 BTC, while gold would have declined from 2,625 ounces to 2,104 ounces.
“The gold quantity had reduced by 20%, but the Bitcoins held grew threefold,” Morris said. “That meant BOLD held ample Bitcoin at the start of the bull market this year. Had the investor not rebalanced, they would have held 93% in Gold and 7% in Bitcoin at the beginning of 2023 and returned 20% instead of BOLD’s 34%.”
“This demonstrates the power of rebalancing, but make no mistake, if you are certain which asset will win in the future, then that asset will beat BOLD,” he said. “The trouble with that is we might think we know which asset will be the strongest, but we don’t.”
Morris noted that the dollar is weakening, “which should provide support for both assets.”
“Gold’s best performance in recent years came in the 2000 to 2011 period, which coincided with a weak dollar,” he said. “Gold peaked in 2011 as the dollar started to recover. The dollar rally last year led to downward pressure on asset prices, and they have been much stronger since it reversed. If the dollar continues to slide, it will be a powerful driver, and BOLD should perform well.”
Dollar index vs. gold. Source: ByteTree
“Bitcoin will probably grow regardless of the dollar as the network is expanding again,” he said. “This means more users, more transactions, more applications, and more wealth being stored and transferred across the blockchain. Bitcoin is back in growth mode, and the future looks bright.”
“The outlook for both Bitcoin and gold is encouraging,” Morris concluded. “Investors are underweight, and both assets have good momentum behind them. We are living in an uncertain world, and after two years of a shrinking money supply, as the central bankers hike interest rates, it seems likely this will reverse. At least that is the message from BOLD, which appears to be forecasting the money supply growth to resume.”
BOLD vs. M2 money supply. Source: ByteTree
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
