The classification of bitcoin as a financial asset still generates a lot of confusion in the minds of those who failed to realize the revolution that digital currencies are causing in the world. I will address in this post about some factors that lead the bitcoin to have a strong independence in formation of price, which differs substantially from all other types of assets.
The Independence of Bitcoin Price.
Given their particular characteristics, the price bitcoin should behave differently from others active, because it is driven or suffers the consequences of different market forces. The market behavior can be quantified by the correlation between assets, a standardized measure that measures the tendency of movement of assets. This measure ranges from +1 to -132. If two assets are perfectly correlated, they are in this band +1. So, when an asset goes up 10%, the other also goes up 10%. If they are negatively correlated to -1 when an active climbing 10% the other will fall 10%.
The more negatively correlated assets are, the greater diversification in an investment portfolio. Consequently, assets that have close correlation to zero are not subject to the same market forces. Over the past five years, bitcoin prices curve was very different compared to other assets. The bitcoin is the only asset that remains consistently low correlation with any other asset. During this period, the maximum correlation of bitcoin, positive or negative was the lowest among all analyzed assets.
This demonstrates the independent behavior of the price of bitcoin in the capital market.
Compared to traditional currencies, which are used as a medium of exchange and store of value, the bitcoin presented an annual correlation of 0.0002 with the MSCI index of global currencies, which includes the currencies of emerging countries. This index compared to shares on US exchanges shows a correlation of 0.7.
This makes me conclude that the bitcoin might not be in the same category of traditional currencies. It is a different asset and its market momentum is proof of that. Macroeconomic events that impact currencies of various countries do not seem to affect negatively bitcoin and there are still elements to prove that affect positively, although we have seen strong valuations last year with the Greek crisis and more recently after Brexit. Compared to other assets, such as bonds, stocks, real estate and oil, bitcoin consistently remained within the borders of the correlation that qualify as a differentiated risk reducer for investment portfolios.
The average bitcoin correlation in relation to all other assets in the last five years, was -0.02, very close to zero, which shows its strong independence in price formation.
Political and Economic profile of Bitcoin.
The vast potential of bitcoin is exactly what maintains its value. The fact that he was not linked to tangible assets and do not have a legal entity behind its operation make them completely different from all the other alternatives. Having bitcoin in your investments represents a verified public credit in an open network that can facilitate all types of transactions. When more infrastructure is built on the bitcoin network, more greater are the demand for supply, so, who have bitcoin will own a scarce digital active, that will increasingly demanding with time, which influence the price positively. Governance behind bitcoin can be considered an anomaly in relation to the governance of other assets.
The bitcoin supply logic does not depend on any central authority, as is the case of traditional coins controlled by governments. The certainty of a declining rate of inflation makes the bitcoin powerful when compared to the US dollar, for example, which has increased its supply according to the will of those who control the monetary policy of the United States.
Risk X Return of Bitcoin.
The comparison of the risk profile in the form of volatility and absolute return of an asset produces a return measured per unit of risk taken called Sharpe Ratio. With daily price variations that have come to exceed 50%, the bitcoin proved over the last five years, to be one of the most volatile asset market. Despite these major changes, the volatility of bitcoin has decreased considerably in the last 18 months.
In early of May in this year, the daily volatility of bitcoin was only one third compared for five years, and 24% lower compared to May 2015. In April this year, the low volatility of the digital currency took the headlines as investors realized that the bitcoin was more stable than gold.
Decreased volatility bitcoin was caused by a number of factors, including more stable and liquid short-term markets, increased regulatory approval, greater adoption of the currency and a growing confidence in the historical data of the asset price. Despite being very volatile, the trend is that the price begins to become more stable. Last year, for example, it was little more volatile than oil prices in the international market.
During his short life, from 2009, the bitcoin provided significant returns to investors, much higher than any other asset class. Last year for example, the return on invested capital was 93%. Considering the last five years, the value was 174%. If considered only the last four years, the recorded increase was 206%. If someone had invested $ 10,000 four years ago, that amount now worth nearly $ 1 million. Compared to other assets, this return is 56-212 times greater. In the past three years, 71% recovery. Only when we look at the range of the last two years is that we see the bitcoin perform below other assets, an increase of 2%, due to the sharp drop in price that occurred after the breakdown of Japanese brokerage Mt. Gox.
The Sharpe Index shows that in the last five years, the bitcoin was active that best performed it and offered the best returns to investors, even considering their strong volatility, when the comparison is made with the actions of grants, government bonds and the market real estate in the United States, gold and oil.
The bitcoin is positioned as a new asset class that will day after day gain more prominence in the investment portfolios around the world.