A Comparative Study of the Functions of Gold and Bit coin in the Financial Industry

Abstract

With the development of society, gold and "digital gold" Bit coin have been incorporated into the portfolio by investors. This paper will help traders predict the price of them, and plan the optimal portfolio strategy, so as to maximize the return and minimize the risk cost We have developed a model that uses only the past stream of daily prices to date to determine each day if the trader should buy, hold, or sell their assets in their portfolio. We will start with $1000 on 9/11/2016. We will use the five-year trading period, from 9/11/2016 to 9/10/2021. On each trading day, the trader will have a portfolio consisting of cash, gold, and bitcoin [C, G, B] in U.S. dollars, troy ounces, and bitcoins, respectively. The initial state is [1000, 0, 0]. The commission for each transaction (purchase or sale) costs α% of the amount traded. Assume α gold = 1% and α bitcoin = 2%. There is no cost to hold an asset. Note that bitcoin can be traded every day, but gold is only traded on days the market is open, as reflected in the pricing data files LBMA-GOLD.csv and BCHAIN-MKPRU.csv. Our model accounts for this trading schedule. To develop our model, we may only use the data in the two spreadsheets: LBMA-GOLD.csv and BCHAIN-MKPRU.csv.