September 10, 2024
The Impact and Opportunity of Bitcoin in a Portfolio
What is bitcoin?
Born in the wake of the 2008 global financial crisis, bitcoin leverages innovative blockchain technology to function as a transparent and decentralized digital asset. Evolving from a concept of peer-to-peer electronic cash to a resilient store of value upheld by open-source code1 and mathematical principles, it ensures highly secure, trust-minimized transactions without a centralized intermediary. Bitcoin is the first natively digital asset and its advent heralded the beginning of digital finance.
The Bitcoin blockchain is a distributed ledger that guarantees a transparent, predictable, and immutable monetary policy,2 which has led many to refer to it as “digital gold.” Bitcoin shares gold’s traditional attributes of being a non-sovereign store of value with a scarce supply, but it also surpasses gold in many ways. While Bitcoin’s gold-like properties have spurred its use as a hedge against central bank monetary policy or inflation, Bitcoin is also significantly more portable, verifiable, transferrable, divisible than gold.
Exhibit 1: Gold vs. Fiat vs. Bitcoin
Source: Galaxy Asset Management
| Traits of Money | Gold | Fiat (USD) | Bitcoin |
|---|---|---|---|
| Scarce (predictable supply) | Moderate | Low | High |
| Durable | High | Moderate | High |
| Portable | Moderate | High | High |
| Divisible | Moderate | Moderate | High |
| Verifiable (cannot be counterfeited) | Moderate | Moderate | High |
| Fungible (interchangeable) | High | High | High |
| Scalable & Easily Transactable | Low | High | High |
| Other Traits to Consider | |||
| Non-Sovereign (Not-government issued) | High | Low | High |
| Longevity | High | Moderate | Low |
| Decentralized | Low | Low | High |
| Smart (programmable) | Low | Low | High |
See Appendix (p. 12) for more explanation.
Why bitcoin belongs in a portfolio?
Bitcoin is the only verifiably scarce, fixed-supply asset in the world. It’s underlying code controls how much new bitcoin is created and limits the maximum amount of bitcoin that will ever exist to 21 million. It’s code is simultaneously enforced by a decentralized network of thousands of independent node3 operators around the world. Bitcoin has a price-inelastic supply, meaning that a change in price does not change its supply issuance.
Said differently, bitcoin’s supply is transparent and immutable; it is strictly bound, algorithmically coded, and governed by a community of global participants that believe in the long-term fundamental properties bitcoin offers to individuals.
Exhibit 2: Bitcoin Supply & Annualized Inflation Rate (Model)
Source: Galaxy Research
Past performance is no guarantee of future similar results.
*Annual Inflation is defined as the annual issuance of new bitcoin relative to the total bitcoin supply. The Bitcoin network is programmed to issue a fixed amount of bitcoin in four-year periods, whereby each new four-year period reduces the bitcoin issuance in half until all 21 million bitcoins are in circulation. Data: Coin Metrics, Galaxy Research as of Aug. 31, 2023.
Bitcoin’s Halving Cycles:
Bitcoin’s fixed terminal supply is enacted in code through quadrennial “halving” events. Approximately every four years, the rate of newly issued bitcoin reduces by half. These events will continue until roughly the year 2140 when the last piece of newly issued bitcoin is expected to be mined. A byproduct of these halving events has provided a seasonality effect in bitcoin’s price, as evidenced in exhibit 3.
Exhibit 3: Bitcoin’s Prior Halving Cycles
Source: Galaxy Research
Past performance is no guarantee of future similar results. Data: Coin Metrics, Galaxy Research as of Aug. 31, 2023.
In a world beset with stubborn inflation, monetary debasement, divergent and extreme fiscal policies, and other macroeconomic challenges, bitcoin’s non-sovereign, transparent, and predictable supply dynamic stands out. Bitcoin’s fundamental properties may help it serve as a hedge against global uncertainties for investment portfolios in the long run.
Historically, bitcoin’s correlation relative to established macro assets, on average, hovers within a +/- 0.30 range around zero. Over its 14-year history, bitcoin has demonstrated very low or even slightly negative correlation to most major global asset classes, including the S&P 500, Russell 2000, MSCI ACWI Index, US Agg Bond Index, Bloomberg Commodities, Gold, and the US Dollar index (see Exhibit 5). It is these typically low correlations to major asset classes paired with bitcoin’s asymmetric return profile that has enabled bitcoin to demonstrate return-enhancing outcomes when added to traditional portfolios. Although bitcoin is more volatile than traditional assets, its 30-day realized volatility continues to decline as adoption grows. While many view bitcoin as a risk asset and more closely correlated to equities, we anticipate bitcoin’s price behavior to resemble other non-fiat stores of value, like gold, in the long-term.
Exhibit 4: Rolling 90-Day Correlations of Bitcoin to Traditional Assets
Source: Galaxy Asset Management
Data: Coin Metrics, Galaxy Research as of Aug. 31, 2023.
Bitcoin is still a novel asset, so there is no guarantee the current relationship between its returns and those of traditional asset classes will persist going forward, but our research suggests bitcoin may have an impactful role in a diversified portfolio. With its unique blend of scarcity, potential for significant returns, and role as a hedge against global macro uncertainties, bitcoin has carved a niche for itself as an indispensable asset in a diversified investment portfolio.
Exhibit 5: Expanded Correlation Matrix
Source: Galaxy Asset Management
Data: Bloomberg, from August 31, 2018 to August 31, 2023.
How to think about a bitcoin allocation?
Fundamentally, we now understand the role bitcoin can play in an investor’s portfolio – a hedge against global financial uncertainty; a scarce, secure, price-inelastic digital commodity, but which also possesses portability features that allow it to function as money. Quantitatively, we now also understand the role bitcoin can play as a diversifier in a portfolio. Next, we would like to further contextualize how bitcoin can enhance a portfolio and ways to think about an allocation.
To perform our test, we started with a base portfolio of 55% equities (S&P 500 index), 35% fixed income (Bloomberg US Aggregate Bond Index), and 10% commodities (Bloomberg Commodities Index) (“Base portfolio”), rebalanced quarterly to these target weights. In our view, a five-year sample lookback period provides a comprehensive, yet conservative, window to assess the impact bitcoin may have on a diversified portfolio. This sample period excludes the bull-run in 2017, but includes two “crypto winters” and the all-time-highs reached in 2021. It was important to capture, in our view, a representative sample of bitcoin’s peaks, troughs, and volatility, while also excluding impacts of the base effect inherent with pre-2018 bitcoin price levels.
To conduct a thorough analysis, we created portfolios containing bitcoin allocations of 1% through 10%, reallocating entirely from the commodity sleeve, entirely from the equity sleeve, entirely from the fixed income sleeve, equally across all three sleeves, and pro rata from all three sleeves – creating fifty model portfolios in total.
In all scenarios, our analysis indicates the best approach to portfolio construction is to “get off zero” when it comes to a bitcoin allocation. Regardless of where the reallocation is sourced, all portfolios we analyzed benefitted from an allocation to bitcoin over the observation period. In fact, the strongest marginal improvement to a portfolio’s risk-adjusted return, as measured by the Sharpe4 and Sortino5 ratios, occurred when moving from a 0% to a 1% allocation.
Exhibit 6: The Risk-Adjusted Benefits of Bitcoin
Source: Galaxy Asset Management
| From Commodity Allocation | From Equity Allocation | From FI Allocation | Equal Allocation | Pro Rata Allocation | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Sharpe | ∆ | Sortino | ∆ | Sharpe | ∆ | Sortino | ∆ | Sharpe | ∆ | Sortino | ∆ | Sharpe | ∆ | Sortino | ∆ | Sharpe | ∆ | Sortino | ∆ | |
| Base Portfolio | 0.17 | 0.00 | 0.26 | 0.00 | 0.17 | 0.00 | 0.26 | 0.00 | 0.17 | 0.00 | 0.26 | 0.00 | 0.17 | 0.00 | 0.26 | 0.00 | 0.17 | 0.00 | 0.26 | 0.00 |
| 1% BTC | 0.23 | 0.06 | 0.35 | 0.09 | 0.23 | 0.06 | 0.36 | 0.09 | 0.23 | 0.06 | 0.36 | 0.09 | 0.23 | 0.06 | 0.35 | 0.09 | 0.23 | 0.06 | 0.35 | 0.09 |
| 2% BTC | 0.28 | 0.05 | 0.43 | 0.08 | 0.29 | 0.06 | 0.44 | 0.09 | 0.29 | 0.06 | 0.44 | 0.09 | 0.29 | 0.05 | 0.44 | 0.08 | 0.29 | 0.06 | 0.44 | 0.08 |
| 3% BTC | 0.33 | 0.05 | 0.51 | 0.08 | 0.34 | 0.05 | 0.52 | 0.08 | 0.34 | 0.05 | 0.52 | 0.08 | 0.34 | 0.05 | 0.52 | 0.08 | 0.34 | 0.05 | 0.52 | 0.08 |
| 4% BTC | 0.38 | 0.04 | 0.58 | 0.07 | 0.39 | 0.05 | 0.60 | 0.08 | 0.39 | 0.05 | 0.60 | 0.07 | 0.38 | 0.05 | 0.59 | 0.07 | 0.39 | 0.05 | 0.59 | 0.07 |
| 5% BTC | 0.42 | 0.04 | 0.64 | 0.07 | 0.44 | 0.05 | 0.68 | 0.07 | 0.44 | 0.04 | 0.67 | 0.07 | 0.43 | 0.04 | 0.66 | 0.07 | 0.43 | 0.05 | 0.66 | 0.07 |
| 6% BTC | 0.45 | 0.04 | 0.70 | 0.06 | 0.48 | 0.04 | 0.74 | 0.07 | 0.47 | 0.04 | 0.73 | 0.06 | 0.47 | 0.04 | 0.72 | 0.06 | 0.47 | 0.04 | 0.72 | 0.06 |
| 7% BTC | 0.49 | 0.03 | 0.76 | 0.05 | 0.52 | 0.04 | 0.81 | 0.06 | 0.51 | 0.03 | 0.78 | 0.06 | 0.50 | 0.03 | 0.77 | 0.06 | 0.50 | 0.04 | 0.78 | 0.06 |
| 8% BTC | 0.52 | 0.03 | 0.80 | 0.05 | 0.55 | 0.03 | 0.86 | 0.06 | 0.54 | 0.03 | 0.83 | 0.05 | 0.53 | 0.03 | 0.83 | 0.05 | 0.54 | 0.03 | 0.83 | 0.05 |
| 9% BTC | 0.54 | 0.03 | 0.85 | 0.04 | 0.58 | 0.03 | 0.91 | 0.05 | 0.57 | 0.03 | 0.88 | 0.05 | 0.56 | 0.03 | 0.87 | 0.05 | 0.56 | 0.03 | 0.88 | 0.05 |
| 10% BTC | 0.56 | 0.02 | 0.89 | 0.04 | 0.61 | 0.03 | 0.96 | 0.05 | 0.59 | 0.02 | 0.92 | 0.04 | 0.58 | 0.02 | 0.91 | 0.04 | 0.59 | 0.03 | 0.92 | 0.04 |
Data: Bloomberg, from August 31, 2018 to August 31, 2023.
But, while “getting off zero” is clear, determining “how to get off zero” is just as important. Once an investor decides to allocate to bitcoin, from where in the portfolio should they draw capital for the allocation? Based on our analysis of the Base portfolio, funding a bitcoin allocation from the equity sleeve provided the most significant portfolio enhancement as measured by lower annualized volatility, higher risk-adjusted returns (Sharpe ratio), and lower maximum drawdowns. Intuitively, this makes sense given bitcoin’s elevated correlation with equities during the observed sample period relative to other asset classes.
Exhibit 7: Risk-Adjusted Returns
Source: Galaxy Research
Exhibit 8: Average Annualized Volatility
Source: Galaxy Research
Exhibit 9: Average Maximum Drawdowns
Source: Galaxy Research
Now, not all investor preferences are the same. An investor’s tolerance towards risk may dictate the size of a bitcoin allocation and where to reallocate from. Consequently, investors that tend to be more risk averse may also benefit by reallocating from their equity sleeve.
Conversely, risk-seeking investors focusing on absolute returns may prefer allocating to bitcoin from their fixed income sleeve.
Our analysis suggests that funding a bitcoin allocation from fixed income may reward investors with higher annualized returns on average, but that comes at the expense of accepting the greatest risk, as measured by average annualized volatility.
Exhibit 10: Average Annualized Returns and Volatility
Source: Galaxy Asset Management
Data: Bloomberg, from August 31, 2018 to August 31, 2023.
An alternative approach to the reallocation question is to look at dynamic rebalancing methods. Since the five-year sample period for our analysis is brief relative to a long-term investment horizon, it may be prudent to initiate a bitcoin allocation pro-rata across the portfolio. Based on our analysis, this allocation framework, on average, resulted in some of the strongest all-around portfolio statistics. The appendix of this paper contains additional details.
One final consideration to the allocation framework brings us back to bitcoin’s role as a diversifier. As a standalone asset, it’s evident that bitcoin has low correlations to most major asset classes.
However, it’s important to demonstrate that bitcoin can maintain its ability to diversify in a portfolio context. To test this, we took our Base portfolio and calculated the correlation of its returns to that of a broad, global multi-asset benchmark – the Barclays Global Multi-Asset index. Next, we calculated the correlations of the returns of each of our model portfolios to the returns of this same benchmark to determine if the addition of bitcoin to our Base portfolio provided any portfolio diversification. The results suggest that bitcoin may not only help further diversify a portfolio, but as the bitcoin allocation increased, so did its ability to enhance portfolio diversification.
Regardless of an individual’s fundamental views of bitcoin, our analysis shows clearly that bitcoin improved the risk-adjusted returns and portfolio diversification of our Base portfolio.
Applying a strategic asset allocation framework to bitcoin can result in several approaches. However, during our five-year sample period, allocating to bitcoin from the Base portfolio’s equity sleeve yielded the strongest risk-adjusted returns, lowest volatility, and lowest draw downs. More importantly, “getting off zero” is not just prudent, but imperative for investors seeking diversification and robust performance. In essence, integrating bitcoin into traditional investment portfolios is no longer a speculative bet, but a forward-looking approach to holistic financial planning and wealth preservation.
Exhibit 11: Portfolio Return Correlations with a Diversified Benchmark
Source: Galaxy Asset Management
Data: Bloomberg, from August 31, 2018 to August 31, 2023.
Appendix: Portfolio Statistics for all Model Portfolios over the 5-year sample period
Source: Galaxy Asset Management
| From Commodity Allocation | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Category | Base | 1% BTC | 2% BTC | 3% BTC | 4% BTC | 5% BTC | 6% BTC | 7% BTC | 8% BTC | 9% BTC | 10% BTC | 5-year Average |
| aReturns | 7.46% | 8.20% | 8.92% | 9.63% | 10.33% | 11.02% | 11.68% | 12.34% | 12.99% | 13.62% | 14.24% | 10.95% |
| aVolatility | 12.37% | 12.52% | 12.73% | 12.99% | 13.29% | 13.63% | 14.01% | 14.42% | 14.86% | 15.32% | 15.81% | 13.81% |
| aDownVolatility | 8.08% | 8.18% | 8.31% | 8.47% | 8.65% | 8.84% | 9.05% | 9.29% | 9.53% | 9.79% | 10.07% | 8.93% |
| Sharpe | 0.17 | 0.23 | 0.28 | 0.33 | 0.38 | 0.42 | 0.45 | 0.49 | 0.52 | 0.54 | 0.56 | 0.40 |
| Sortino | 0.26 | 0.35 | 0.43 | 0.51 | 0.58 | 0.64 | 0.70 | 0.76 | 0.80 | 0.85 | 0.89 | 0.62 |
| MaxDrawDown | -21.04% | -21.28% | -21.52% | -21.76% | -22.00% | -22.23% | -22.90% | -23.87% | -24.84% | -25.80% | -26.74% | -23.09% |
| Global Index Corr | 0.59 | 0.59 | 0.58 | 0.58 | 0.57 | 0.56 | 0.55 | 0.54 | 0.53 | 0.52 | 0.51 | 0.56 |
| From Equity Allocation | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Category | Base | 1% BTC | 2% BTC | 3% BTC | 4% BTC | 5% BTC | 6% BTC | 7% BTC | 8% BTC | 9% BTC | 10% BTC | 5-year Average |
| aReturns | 7.46% | 8.16% | 8.85% | 9.53% | 10.20% | 10.88% | 11.50% | 12.13% | 12.75% | 13.36% | 13.96% | 10.80% |
| aVolatility | 12.37% | 12.38% | 12.45% | 12.57% | 12.74% | 12.96% | 13.22% | 13.51% | 13.84% | 14.20% | 14.59% | 13.17% |
| aDownVolatility | 8.08% | 8.10% | 8.14% | 8.21% | 8.31% | 8.42% | 8.56% | 8.72% | 8.90% | 9.09% | 9.30% | 8.53% |
| Sharpe | 0.17 | 0.23 | 0.29 | 0.34 | 0.39 | 0.44 | 0.48 | 0.52 | 0.55 | 0.58 | 0.61 | 0.42 |
| Sortino | 0.26 | 0.36 | 0.44 | 0.52 | 0.60 | 0.68 | 0.74 | 0.81 | 0.86 | 0.91 | 0.96 | 0.65 |
| MaxDrawDown | -21.04% | -21.13% | -21.22% | -21.32% | -21.41% | -21.50% | -21.60% | -21.69% | -22.34% | -23.01% | -23.67% | -21.81% |
| Global Index Corr | 0.59 | 0.59 | 0.58 | 0.58 | 0.57 | 0.56 | 0.55 | 0.54 | 0.53 | 0.51 | 0.50 | 0.56 |
| From FI Allocation | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Category | Base | 1% BTC | 2% BTC | 3% BTC | 4% BTC | 5% BTC | 6% BTC | 7% BTC | 8% BTC | 9% BTC | 10% BTC | 5-year Average |
| aReturns | 7.46% | 8.27% | 9.06% | 9.84% | 10.61% | 11.39% | 12.11% | 12.84% | 13.56% | 14.26% | 14.96% | 11.30% |
| aVolatility | 12.37% | 12.59% | 12.86% | 13.17% | 13.53% | 13.93% | 14.36% | 14.82% | 15.30% | 15.81% | 16.33% | 14.10% |
| aDownVolatility | 8.08% | 8.23% | 8.41% | 8.61% | 8.83% | 9.07% | 9.32% | 9.59% | 9.88% | 10.17% | 10.48% | 9.15% |
| Sharpe | 0.17 | 0.23 | 0.29 | 0.34 | 0.39 | 0.44 | 0.47 | 0.51 | 0.54 | 0.57 | 0.59 | 0.41 |
| Sortino | 0.26 | 0.36 | 0.44 | 0.52 | 0.60 | 0.67 | 0.73 | 0.78 | 0.83 | 0.88 | 0.92 | 0.64 |
| MaxDrawDown | -21.04% | -21.46% | -21.88% | -22.29% | -22.71% | -23.12% | -23.53% | -23.93% | -24.33% | -24.73% | -25.15% | -23.10% |
| Global Index Corr | 0.59 | 0.59 | 0.58 | 0.57 | 0.57 | 0.56 | 0.55 | 0.54 | 0.53 | 0.52 | 0.50 | 0.55 |
| Equal Allocation | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Category | Base | 1% BTC | 2% BTC | 3% BTC | 4% BTC | 5% BTC | 6% BTC | 7% BTC | 8% BTC | 9% BTC | 10% BTC | 5-year Average |
| aReturns | 7.46% | 8.21% | 8.94% | 9.67% | 10.38% | 11.10% | 11.77% | 12.44% | 13.10% | 13.75% | 14.39% | 11.02% |
| aVolatility | 12.37% | 12.49% | 12.68% | 12.91% | 13.18% | 13.50% | 13.85% | 14.23% | 14.65% | 15.08% | 15.54% | 13.68% |
| aDownVolatility | 8.08% | 8.17% | 8.29% | 8.43% | 8.59% | 8.77% | 8.97% | 9.19% | 9.42% | 9.67% | 9.93% | 8.87% |
| Sharpe | 0.17 | 0.23 | 0.29 | 0.34 | 0.38 | 0.43 | 0.47 | 0.50 | 0.53 | 0.56 | 0.58 | 0.41 |
| Sortino | 0.26 | 0.35 | 0.44 | 0.52 | 0.59 | 0.66 | 0.72 | 0.77 | 0.83 | 0.87 | 0.91 | 0.63 |
| MaxDrawDown | -21.04% | -21.29% | -21.54% | -21.79% | -22.04% | -22.28% | -22.53% | -22.77% | -23.33% | -24.12% | -24.89% | -22.51% |
| Global Index Corr | 0.59 | 0.59 | 0.58 | 0.58 | 0.57 | 0.56 | 0.55 | 0.54 | 0.53 | 0.52 | 0.51 | 0.56 |
| Pro Rata Allocation | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Category | Base | 1% BTC | 2% BTC | 3% BTC | 4% BTC | 5% BTC | 6% BTC | 7% BTC | 8% BTC | 9% BTC | 10% BTC | 5-year Average |
| aReturns | 7.46% | 8.20% | 8.93% | 9.65% | 10.36% | 11.07% | 11.73% | 12.40% | 13.06% | 13.71% | 14.34% | 10.99% |
| aVolatility | 12.37% | 12.47% | 12.62% | 12.82% | 13.07% | 13.36% | 13.69% | 14.05% | 14.44% | 14.86% | 15.30% | 13.55% |
| aDownVolatility | 8.08% | 8.15% | 8.25% | 8.38% | 8.52% | 8.69% | 8.87% | 9.08% | 9.29% | 9.53% | 9.77% | 8.78% |
| Sharpe | 0.17 | 0.23 | 0.29 | 0.34 | 0.39 | 0.43 | 0.47 | 0.50 | 0.54 | 0.56 | 0.59 | 0.41 |
| Sortino | 0.26 | 0.35 | 0.44 | 0.52 | 0.59 | 0.66 | 0.72 | 0.78 | 0.83 | 0.88 | 0.92 | 0.63 |
| MaxDrawDown | -21.04% | -21.26% | -21.48% | -21.70% | -21.92% | -22.14% | -22.36% | -22.57% | -22.79% | -23.47% | -24.19% | -22.27% |
| Global Index Corr | 0.59 | 0.59 | 0.58 | 0.58 | 0.57 | 0.56 | 0.55 | 0.54 | 0.53 | 0.52 | 0.50 | 0.55 |
Index Definitions
| Name | Index |
|---|---|
| Bitcoin | BBG Galaxy Bitcoin Index |
| S&P 500 | S&P 500 Total Return |
| NASDAQ 100 | NASDAQ 100 Total Return |
| Russell 2000 | Russell 2000 TR Idx |
| MSCI ACWI | MSCI AC World Daily TR N |
| MSCI EAFE | MSCI EAFE NR |
| MSCI EM | MSCI EM |
| US Aggregate | Bloomberg US Agg Total Return Value Unhedged USD Index |
| Global Aggregate | Bloomberg Global-Aggregate Total Return Index Value Unhedged USD Index US Corporate |
| Global Corporate | Bloomberg Global Agg Corporate Total Return Index Value Unhedged USD Index Global High Yield |
| 1-3 Month T-Bills | US Treasury Bills 1-3 Month Index |
| US REITs | FTSE NAREIT EQTY REIT TR |
| Commodities | BBG Commodity TR |
| Global REITs | FTSE ENXG INDEX |
| Gold | XAUUSD |
| US Dollar Index | DXY Index |
| Base Portfolio (55/35/10) | 55% S&P 500 Total Return, 35% Bloomberg US Aggregate Bond Index, and 10% Bloomberg Commodities Index |
Definitions and Explanations
| Exhibit 1: Gold vs. Fiat vs. Bitcoin | |
|---|---|
| Scarce: | Refers to the supply being limited in number. Gold is scarce. Fiat is subject to a government or central bank. Bitcoin is scarce and finite. |
| Durable: | Refers to the ability to maintain its purchasing power over time. |
| Portable: | Refers to how easily transferable it is from one party to another. For instance, gold is very heavy and cumbersome to transport. |
| Divisible: | Refers to the size of the smallest denomination in native units. Physical gold is only divisible to small pieces. Fiat is divisible to two decimals (1 cent). Bitcoin is divisible to eight decimals (1 satoshi or sat). |
| Verifiable: | Refers to its resistance to being counterfeit or duplicated. Both gold and fiat have been counterfeited and verification can be cumbersome. |
| Fungible: | Refers to its ability to be interchangeable with other units of its denomination. |
| Scalable: | Refers to the speed, volume, and low-cost in which a denomination can be transferred or transacted with. |
| Non-Soveirgn: | Refers to the lack of centralized or single-state oversight. |
| Longeity: | Refers to the length of time it has been in circulation. Gold has the longest track record as money and maintaining purchasing power. |
| Decentralized: | Refers to the level of control governing the denomination’s supply and economic properties. Bitcoin operates entirely on a decentralized peer-to-peer network without the need for intermediaries. Transactions are recorded on a public ledge through the blockchain. |
| Smart: | Refers to the transparency and ability of the denomination’s supply to be programmed or systematically managed. |
| Appendix: Portfolio Metrics | |
|---|---|
| aReturns: | Annualized Return |
| aVolatility: | Annualized Volatility as measured by the standard deviation of daily returns |
| aDownVolatility: | Annualized Downside Volatility as measured by the standard deviation of daily negative returns |
| Sharpe Ratio: | Annualized return (in excess of the risk-free rate) divided by annualized volatility |
| Sortino Ratio: | Annualized return (in excess of the risk-free rate) divided by annualized downside volatility |
| MaxDrawDown: | Maximum Drawdown of daily returns from peak-to-trough |
| Global Index Corr.: | Correlation of the specific portfolio relative to the Barclays Global Multi-Asset Index |
1 Open-source code refers to software that is made available in source code form, under a license that allows users to use, modify, and distribute the code freely.
2 An immutable monetary policy refers to the ability to maintain the issuance and overall supply of a denomination so no one individual or centralized body can alter the policy in the future.
3 A Bitcoin node is a computer that stores a copy of the entire Bitcoin blockchain and verifies transactions on the network.
4 A Sharpe ratio is a measure of a portfolio’s risk-adjusted performance. It compares the portfolio’s return to its risk, as measured by standard deviation. A higher sharpe ratio indicates a better risk- adjusted performance. Sharpe ratio = (Annualized Portfolio Return – Risk-Free Rate) / Annualized Volatility
5 The Sortino ratio is a measure of a portfolio’s risk-adjusted performance. It compares the portfolio’s return to its downside volatility, rather than total volatility. Sortino ratio = (Annualized Portfolio Return – Risk-Free Rate) / Annualized Downside Volatility
About the Author
David Knowlton is the Head of Product for Galaxy Asset Management and is responsible for the execution of their product strategy across their passive, active, and venture franchises. Prior to joining Galaxy, David was the Vice President of ETF Product Development at Advisors Asset Management. Before that, he was an ETF Client Solutions Specialist at BNY Mellon and an ETF Operations Manager at State Street Bank. David holds a B.S.B.A. in Finance from Bryant University and is a CFA charterholder.
About the Author
Andy Murphy is a Product Specialist for Galaxy Asset Management. Prior to joining Galaxy, Andy spent 4 years at AQR Capital Management as a Business Development Associate. Before that, Andy worked as an analyst at J.P. Morgan Private Bank. He earned a B.S. in Finance from Wake Forest University and an M.B.A. from Columbia Business School.
LEGAL DISCLOSURE
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