For crypto investors, 2022 is starting to feel like a distant memory. In 2023, cryptocurrencies like Bitcoin (BTC 0.60%) are soaring and investor appetite is returning for even the riskiest tokens. Even Goldman Sachs Group (GS 1.59%) -- once a critic of the crypto asset class -- is getting into the act. According to a new Goldman Sachs report, Bitcoin is now the best-performing asset in the world on both an absolute and risk-adjusted basis.
The findings from that report could have important implications for Bitcoin's future price trajectory. Remember, it was just one year ago that Goldman Sachs slapped a $100,000 price target on Bitcoin, so this report might mark the much-anticipated return of bullish sentiment for crypto on Wall Street in 2023.
Risk-adjusted versus absolute returns
Goldman Sachs compared both risk-adjusted and absolute returns across 25 different asset classes. Bitcoin ranked No. 1 in absolute returns and No. 1 in terms of risk-adjusted returns. The next closest competitor was the MSCI Emerging Markets index, but it wasn't even close. The MSCI Emerging Markets index offered a lower absolute return and lower risk-adjusted returns as well.
In order to calculate risk-adjusted returns, Goldman Sachs used a popular metric called the Sharpe ratio, which compares the return of an investment with its underlying risk and volatility. In short, it's not enough to say that Bitcoin is now up nearly 40% year to date, because everyone knows that crypto is a very risky and volatile asset class. You are taking on tremendous risk to generate those returns. If another investment could generate those same returns by taking on less risk, it would be superior.
That's why I was blown away by the Goldman Sachs numbers. Even taking into account all the inherent volatility of crypto, Bitcoin was still a better investment than any other asset class on the planet. It beat out risky assets like emerging market stocks and high-yield debt, and it beat out much safer investments like gold and the S&P 500. The Sharpe ratio for Bitcoin was 3.1, which is absolutely phenomenal. When calculating this ratio, anything between 1 and 2 is considered good, and anything between 2 and 3 is very good. So Bitcoin absolutely hit it out of the park in January.
The implications
This is great news for crypto as an asset class, and could make Bitcoin much more palatable for institutional investors with a low risk tolerance. In 2022, Goldman Sachs began offering new Bitcoin-related products and services to clients, and this January report might be the key to offering even more in 2023. After all, when FTX collapsed last year, it was rumored Goldman Sachs was going to start buying crypto assets on the cheap. Could this bullish report on Bitcoin be the prelude to new moves by Goldman Sachs in the crypto market?
Image source: Getty Images.
The big caveat here is that one month is a short period of time. Just because Bitcoin soared in January doesn't mean it's headed straight up for the rest of 2023. Crypto still remains a risky and volatile asset class. If you're a crypto skeptic, you could just as easily interpret the new Goldman Sachs data on risk-adjusted returns to mean: If you're crazy enough to take on all the volatility of crypto, then Bitcoin gives you the best bang for your buck.
Moreover, consider just how quickly sentiment can change. In December, Goldman Sachs released completely contradictory findings suggesting that gold is a better investment than Bitcoin. At that time, the outlook for the economy looked bleak and it might have been natural to assume that gold would continue to outperform Bitcoin in 2023. But, as we've seen through the first month of this year, that hasn't been the case.
The big picture for Bitcoin
Taking a big-picture view, it's clear the macroeconomic outlook for the economy plays a major role in how investors view Bitcoin. At one time, people thought Bitcoin's performance was completely uncorrelated with the broader financial market, but now that appears to be false. As the broader market goes, so goes Bitcoin. The good news is, that at least according to Goldman Sachs, Bitcoin looks like one of the best investments you can make if you believe U.S. economic growth is returning.
Going forward, I'm keeping a close eye on what's happening with institutional investors in the crypto market. If they are bullish on Bitcoin, then that's a good sign. It means there will be tremendous support for the crypto asset class from some of the smartest investors in the world. As they allocate some of their portfolios to crypto, that could push up the value of Bitcoin. For that reason, I remain bullish on Bitcoin both short- and long-term.
