Bitcoin is a principally new asset class

Bitcoin is not easy to understand for the average investor. Most people know that owning shares in a successful company leads to an increase in welfare through growth of their course. And in difficult times on the stock markets, you can sit in the bonds.

With Bitcoin it is not so obvious. Is it worth to have it in my investment portfolio? If Yes, what portion of the portfolio should consist of this digital asset?

This, however, did not stop the 7 million people from around the world from investing in Bitcoin. Despite the fact that it is only 1% of the total number of investors in the stock markets, even they were enough to drive the price of bitcoin from zero to the current $650. Daily trading volume almost reached $1 billion, and market capitalization approached $10 billion.

In the network appeared the detailed report, which provides a detailed analysis of this fascinating phenomenon. The authors, which is what Chris Burniske (Burniske), the blockchain analyst and head of Investment products ARK and Adam white, Vice-President of the Department of business development at Coinbase, you come to the conclusion that Bitcoin is the first representative of a new class of assets. They also believe that it should be seriously considered as a means of diversifying an investment portfolio.
Given the fact that at the end of 2015, households of only one country – the United States, holding $34,5 trillion in investment assets, a large degree of acceptance of Bitcoin as an investment may increase its price, trading volume and market capitalization several orders of magnitude.

The analysis looks at Bitcoin from the perspective of four characteristics that define the asset classes: suitability for investment, political-economic characteristics, the correlation between States of profitability or pricing independence, and profile risk-return.

Burniske and white come to the conclusion that Bitcoin is the first representative of the individual, a completely new class of assets. They claim that the terms “cryptocurrency”, a “virtual currency” or “digital currency” to lead people astray, as indicate such investments to a subset of the currency asset class. Based on that they offer other terms, such as cryptomaria, kryptonit, kryptonic, account or brand consensus a bit. In addition, they according to them, the new terminology could help to clarify differences in how to regulate Bitcoin.
Suitability for investment
White asks: “Can investors with significant capital in some way interact with the asset in this class?“. Answer: Yes. Average daily stock exchange trading volume of bitcoin in the first quarter of 2016 is approximately $1 billion in fact, the liquidity of the bitcoin market liquidity is approximately equal to the largest ETF on gold (GLD) and 3 times more ETF Vanguard (VNQ), and this despite the fact that the assets of GLD VNQ and kept much more money ($34 and $56 billion respectively. “In our opinion, equal to or greater than the trading volume of smaller capitalization asset underlines the fact that Bitcoin is a much stronger asset,“ write the reporters.

Bernoski says that this is an indication that Bitcoin could “become a super-liquid asset that will appeal to many traders,“ – adding that the availability of anywhere in the world will attract more liquidity than assets divided by geographical and political boundaries.

The authors even suggest that in the future a large percentage of the population may tend to keep their money in bitcoin than in shares of public companies.“

Political-economic characteristics
Bitcoin also differs from other major asset classes of its base value (value), method of control and applications. The value he gives what he is able to facilitate all types of transactions, starting with the most basic sphere of cash: bitcoins can be sent anywhere in the world instantly, securely, and transparently with near-zero cost. The authors write: “At that time, as a purely digital based on consensus, the asset may seem alien, the fact that he was born in a rapidly ‘ocifrovivaem’ and optimalise socreate the world, is not a surprise.“

“He works and is operated under the control of the Protocol, which is supported by a distributed network of computers,“ says white. “This is in sharp contrast with Fiat currency, the rules of operation of which are dictated by state monetary policy. In fact, Bitcoin is only a set of mathematical rules and code running on many computers around the world to provide confidence. The complete opposite are Fiat money, managed by a small group of persons.“

When you look at dynamics of growth of gold reserves and money supply of the United States, is clearly visible in stark contrast to Bitcoin, whose maximum issue is limited to 21 million units.



The ability of this asset is much different from the capabilities of other assets. “Samospalenie contracts (smartcontrast) in Bitcoin is very real, and we are just starting to see the arrival of the Internet through the same scriptaction,“ says white. “The idea of self-executing contract does not exist in commodity assets or real estate.

The correlation between States of profitability or pricing independence
The strongest argument in favor of the inclusion of Bitcoin in the investment portfolio de-korrelirovannykh course courses relative to other assets. The authors evaluated the correlation over the past five years with the S&P500, us bonds, Bitcoins, US real estate, oil and emerging market currencies. On the chart below, the correlation is equal to ‘1’ would mean complete correlation between States. The correlation is equal to ‘-1’ would mean the opposite price movements of assets.

“For me it was important to see how close was the Bitcoin to zero compared to other assets. This means that the rate Bitcoins are least connected to other traditional assets,“ says Bernicke. “What I saw is the fact that the maximum correlation of Bitcoin with the other asset classes were below the minimum values for any of the considered list.“

Thus, Bitcoin can be considered extremely de-correlated asset relative to traditional asset classes. This is very important from the point of view of portfolio investment.

Profile risk-return
Profile, risk-return can be best seen through the lens of the Sharpe ratio, which measures the size of the return for a given asset per unit of risk taken. “The return of the asset may go overboard, but if he is super volatile, the rate of return on investment may be low,“ says Bernicke. “What you want to see is assets with a high Sharpe ratio, because it means the best amount of compensation for the taken risks.

As can be seen from the graph below, three of the five studied years, Bitcoin is superior to the Sharpe ratio of any other of the studied assets.

Signs of growing up
Bitcoin is still an initial reputation currency for online drug dealers, and a very volatile asset for speculative investment. Only recently, he began to look more like ‘adults’ asset classes. For example, its weekly volatility, at present, only one percentage point higher than the comparable figure for oil.

And despite its reputation as a speculative investment, and the fact that they have more to trade than a couple of years ago, Bitcoin is still most commonly used for committing transactions, rather than trade on the stock exchange, in contrast to Fiat currencies. This happens mainly because traditional currency markets are much more active.

Burniske and white also think that some holders of gold are gradually turning towards Bitcoin. They note that in 2013 the price of gold dipped by only 25%, but the two largest ETFs for precious metals when it depreciated by half – from $74,5 billion to $30 billion and $11.9 billion to $6.2 billion. “it's safe to assume that a significant part of this drop in the capitalization associated with the outflow of capital,“ the authors write. Meanwhile, assets under management of the ecosystem Bitcoin has grown 60 times.

In addition, the cryptocurrency markets came from professional traders. “Many of the biggest Forex traders are professional trading technique or algorithmically,“ says white. “They're watching the market, have in their Arsenal a variety of strategies and will use them on the bitcoin markets.

The distinctive feature of bitcoin markets is that there is a wide arbitrage opportunities. “Bitcoins are interchangeable. No matter what exchange you own bitcoins. The coins are the same everywhere and equal. Bitcoin is bitcoin, where he was”
In addition to building a global trading chains, Bitcoin is also its entrenched in wall street. Since September 2013, when Investments were offered traditional financial investment vehicle called the Bitcoin Investment Trust (GBTC), which offers investors a to profit from exchange rate movements Bitcoin, not owning bitcoins. One of the largest derivatives exchanges, the CME Group in may announced the launch of Bitcoin the basic rate and index in real time in the fourth quarter of this year.

“Base rate from CME Bitcoin will one day be more traditional reference rate,“ says Executive Director Sandra Ro. “Like the traders of metals and the Forex markets, people are looking for information mechanism. This is our way to add confidence to the emerging market“.

According to Sandra Ro, Bitcoin has features and Forex assets and precious metals. However, it is not correlated with either of these two assets.
In 2015, the prevailing view of what the blockchain technology behind Bitcoin, the revolutionary, and the Bitcoin no.

The “peak of hype around the concept of ‘main blockchain and Bitcoin no’ has passed,“ says white. “The pendulum has swung in the opposite direction: people began to understand the value of an open, distributed networks such as Bitcoin... In the early ' 90s, when the Internet began to walk through the world, if you asked someone on Wikipedia is a global library or source of information, people could not imagine creating something like that.

If the Internet remains private and closed, controlled by a handful of large corporations, I don't think they would give us all existing innovations or services based on this technology. All this became possible thanks to the open source architecture of the Internet. Anyone could build on its basis something of their own. I think the same thing will happen with Bitcoin and Ethereum, and perhaps also with other, not yet born blockchains“.