New analysis: Bitcoin is a safer investment than stocks, real estate, bonds and gold over 4 years

One of the fronts Bitcoin is fighting is proof that it’s worth investing in. The argument against it is usually: The crypto currency is too volatile for a long-term investment.

However, a tweet from Nick Szabo, the father of the smart contracts, shows that Bitcoin’s risk-adjusted returns outweigh other popular assets for more than four years – by far.

Szabo (@ NickSzabo4) tweeted a chart that Bitcoin outperforms US equities, US real estate, bonds, gold, oil and emerging currencies in terms of risk-adjusted returns using the Sharpe ratio.

The Sharpe ratio shows investors the return on an investment compared to their risk. The ratio is the average return that is achieved above the risk-free rate per volatility unit or the total risk.

The conclusion from this graph: While Bitcoin is a volatile asset and therefore has a higher risk, the performance outweighs this risk significantly more than with traditionally safer investments such as gold and real estate.

Successful Bitcoin holders have low time preference & judge over extended periods, e.g. risk-adjusted return over 4-year holding periods. If an economist has not researched this strong market signal for explanations of supply & demand, they don't have a useful opinion about it. pic.twitter.com/t8iazHZDxc

— Nick Szabo 🔑 (@NickSzabo4) January 22, 2020

Take advantage of Bitcoin’s volatility

Volatility is a double-edged sword for Bitcoin. There is no doubt that rising volatility pushed BTC into the mainstream through 2017 and helped many small investors take note of the gains they could make by simply sticking to it.

In the 2018 bear market, many investors were given food for thought when the nauseating lows scared away hordes of investors.

But as Szabo emphasizes, over four or more years, Bitcoin proves that an investment is worthwhile because the risk of volatility is offset by the returns.

The only assets that roughly match Bitcoin in the Sharpe ratio are stocks and real estate – but the cryptocurrency dating back to late 2013 still doesn’t cut or exceed them.

What happens in a recession?

A Twitter user asks Szabo what effects a recession would have on such a graphic and how the price of Bitcoin would move in such a situation. Szabo’s poignant answer: Bodies such as the US Federal Reserve that are responsible for federal monetary policy and the overall economic impact would not be able to predict what would result from their own interference.

Dollar prices of assets are very dependent on the subjective decisions the Fed makes about interest rates, money supply, asset financing and asset purchases, so you should ask them to predict what their own behavior would be in such a circumstance. Even they can't predict that.

— Nick Szabo 🔑 (@NickSzabo4) January 22, 2020

Many people argue that Bitcoin would be an ideal hedge in a recession. On the other hand, some stress that Bitcoin would be too risky to hedge against a financial crisis. 

However, the graph created by Szabo seems to indicate that the risk is worth the reward – especially in connection with an expected decline in the Sharpe ratio for traditional assets that are directly affected by federal monetary policy.