Bitcoin's Undervaluation vs. Gold in a Low-Volatility Regime: A New Era for Institutional Portfolios

Institutional investors are recalibrating their portfolios to navigate a world where Bitcoin and gold are no longer seen as mutually exclusive but as complementary assets. The maturation of Bitcoin’s market—marked by a 75% decline in volatility since 2023 and regulatory milestones such as U.S. spot ETF approvals and bank custody authorizations—has positioned it as a credible alternative to gold, a traditional safe-haven asset. Yet, the question remains: Is Bitcoin undervalued relative to gold in a low-volatility regime, and how can institutional portfolios leverage this dynamic to enhance risk-adjusted returns?

Bitcoin’s volatility has plummeted to historic lows, with its six-month rolling volatility dropping from nearly 60% in early 2025 to around 30% by year-end [1]. This decline, driven by institutional adoption and regulatory clarity, has made Bitcoin less volatile than 33 S&P 500 stocks and just twice as volatile as gold, the lowest ratio on record [2]. JPMorgan analysts argue that Bitcoin is currently undervalued by $16,000 relative to gold, with a potential price target of $126,000 to align with gold’s $5 trillion market cap [3]. Meanwhile, gold’s role as a diversifier has weakened slightly, as its correlation with equities has risen since 2005 [4].

The risk-adjusted return metrics tell a compelling story. Bitcoin’s Sharpe ratio from 2020 to 2025 reached 0.96, outperforming the S&P 500’s 0.65 during the same period [5]. Adding 5% Bitcoin to a traditional 60/40 portfolio (stocks and bonds) boosted the Sharpe ratio from 0.85 to 1.51, with average annual returns rising to 21.9% from 10.6% [6]. Gold, while less volatile, has not matched Bitcoin’s performance in downside-adjusted metrics. However, combined Bitcoin-gold portfolios have shown even greater promise. A study found that Bitcoin-gold allocations achieved Sharpe ratios of 1.5–2.5, outperforming both assets individually [7]. This synergy arises from their divergent correlations: Bitcoin’s exposure to macroeconomic tailwinds and institutional adoption contrasts with gold’s resilience during crises [8].

Institutional adoption has accelerated this shift. Over $138 billion in institutional inflows into Bitcoin by early 2025 reflects a growing acceptance of its role as a long-term store of value [9]. Central banks, meanwhile, added 710 tonnes of gold in 2025, underscoring its enduring appeal [10]. Yet, the convergence of Bitcoin and gold in portfolios is now a strategic imperative. A 5–10% allocation to Bitcoin for growth and 10–15% to gold for stability has become a common framework, particularly in low-volatility regimes where Bitcoin’s volatility-adjusted returns are most pronounced [11].

The case for rebalancing is further strengthened by Bitcoin’s structural advantages. Its capped supply of 21 million coins ensures long-term scarcity, a feature that gold lacks due to its variable supply influenced by geological factors [12]. Moreover, Bitcoin’s integration into blended indices—such as Bloomberg and ByteTree’s dynamic Bitcoin-gold indices—enables real-time volatility-based rebalancing, optimizing risk-return profiles [13].

Critics argue that Bitcoin’s high volatility still poses risks, but the data suggests this volatility is now more predictable. Bitcoin’s volatility is currently in the 5th percentile of all weekly readings since 2015, a sign of its maturation as an institutional-grade asset [14]. In contrast, gold’s larger $23.5 trillion market cap and central bank demand provide stability but limit growth potential [15].

For institutional investors, the path forward is clear: a dual-asset strategy that leverages Bitcoin’s growth and gold’s stability. This approach not only mitigates the risks of overexposure to either asset but also capitalizes on their complementary roles in a low-volatility world. As markets continue to evolve, the undervaluation of Bitcoin relative to gold may present a unique opportunity for those willing to rebalance their portfolios with a forward-looking lens.

Source:
[1] Bitcoin's Volatility Compared to Gold Reaches Historic Low [https://www.bitget.com/news/detail/12560604895192]
[2] Bitcoin Undervalued Versus Gold as Volatility Collapses [https://uk.finance.yahoo.com/news/bitcoin-undervalued-versus-gold-volatility-133242828.html]
[3] JPMorgan says Bitcoin stability will bring bigger investors [https://www.mitrade.com/insights/news/live-news/article-3-1077973-20250829]
[4] Diverging Trends in Bitcoin and Gold Amid Macroeconomic Uncertainty [https://www.ainvest.com/news/diverging-trends-bitcoin-gold-macroeconomic-uncertainty-strategic-rebalancing-risk-world-2508]
[5] A Closer Look at Bitcoin's Volatility [https://www.fidelitydigitalassets.com/research-and-insights/closer-look-bitcoins-volatility]
[6] Reflecting on Bitcoin's Impact and Its Evolving Role in Modern Portfolios [https://bitwiseinvestments.eu/blog/crypto-research/reflecting-on-bitcoins-impact-and-its-evolving-role-in-modern-portfolios/]
[7] Bitcoin and Gold Dominate Risk-Adjusted Returns [https://ecoinometrics.substack.com/p/bitcoin-and-gold-dominate-risk-adjusted]
[8] Bitcoin and Gold: The Power Couple for Smarter Portfolios [https://www.21shares.com/en-eu/research/bitcoin-and-gold-the-power-couple-for-smarter-portfolios]
[9] Bitcoin's Declining Volatility and Institutional Adoption [https://www.ainvest.com/news/bitcoin-declining-volatility-institutional-adoption-chapter-cryptocurrency-story-2507]
[10] From Bullion to Bitcoin: Study Shows Gold and Crypto Belong Together [https://www.ssga.com/us/en/intermediary/insights/from-bullion-to-bitcoin-study-shows-gold-and-crypto-belong-together]
[11] Bitcoin vs. Gold: Which is the Better Long-Term Store of [https://www.ainvest.com/news/bitcoin-gold-long-term-store-high-inflation-world-2508]
[12] Bitcoin vs Gold: Which Asset Represents the Best Store of Value? [https://blog.bitpanda.com/en/bitcoin-vs-gold-which-asset-represents-best-store-value-2025]
[13] Bitcoin's Volatility Compared to Gold Reaches Historic Low [https://www.bitget.com/news/detail/12560604895192]
[14] Bitcoin's Declining Volatility Could Make It More Attractive to [https://www.mitrade.com/insights/news/live-news/article-3-1078156-20250829]
[15] Bitcoin vs. Gold: Which is the Better Long-Term Store of [https://www.ainvest.com/news/bitcoin-gold-long-term-store-high-inflation-world-2508]