Crypto Winter - Bitcoin Hodlers Relax ...Nothing has Changed

Crypto Winter - Bitcoin Hodlers Relax ...Nothing has Changed

Disclaimer: This article is intended for educational purposes only. The assessments, analyzes and graphics are based on information that the editors consider reliable. However, the editors and publisher cannot guarantee the accuracy of the information. We assume no liability for losses incurred by third parties as a result of them acting or not acting on the basis of information published in this article. All questions about specific investment decisions should be discussed with a competent advisor.?

Introduction

In this article we would like to shed some light on the properties of Bitcoin as an investment vehicle with the perspective of creating a level playing when comparing different assets.

Also, it is important to avoid isolated views on single assets without looking at the historical context and other benchmarks: E.g., discussing the daily volatility of Bitcoin and deriving predictions about future developments. As already Niels Bohr stated: "Predictions are very difficult, especially about the future".

We are neither Bitcoin maximalists nor minimalists, so we are not discussing any fundamental issues of Bitcoin like energy consumption or other technical or practical concerns. Instead we want to assess the observable, quantitative properties of Bitcoin as an investment instrument and discuss if (given the current crypto winter) these have significantly changed so far. The main question:

Is Bitcoin having favorable properties as an investment vehicle and is it still a reasonable component of a diversified portfolio?

Approach

Our fundamental assumption is that markets are the best price discovery mechanism, so we just look at the historic price developments and no other data.

Also, in order to make instruments comparable, we introduce the concept of deleveraging, which simply means that we downscale Bitcoin to the extent, where we can compare it with our benchmark the MSCI World NR index.

Performance Development: Bitcoin vs.?MSCI World

The following charts shows the main problem when comparing Bitcoin with other assets (in this case global equity). We can immediately observe, that the long-term performance of Bitcoin is much higher than the MSCI World, but this outperformance comes a a cost, which is immediately visible: Bitcoin shows significantly higher volatility and thus carries significantly higher risks.

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Downscaling

With downscaling, we are able to make Bitcoin comparable to equity world, we can see that a potential solution room could be between 10% and 30% Bitcoin exposure. In this sample we show the risk/return profiles of 10%, 20% and 30% Bitcoin exposure, in relation to the MSCI World index.

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Note: Downscaling is just the opposite of leveraging, where we invest a fraction of the available capital to the risky asset. In practice, a 10% Bitcoin exposure could result in e.g. 1 USD invested in Bitcoin for each 10 USD and the remaining 9 USD are kept either in cash or in money market instruments. Using derivatives is also possible.

Performance Comparison 10% Bitcoin Exposure vs. MSCI World

As a 10% Bitcoin exposure shows a similar annualized return and much lower volatility than the MSCI World within the same observation window, we continue with analyzing this Bitcoin exposure. We can now observe, that MSCI World and 10% Bitcoin show a rather similar overall performance.

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However, the Sharpe Ratio of 10% Bitcoin is approx. 2x higher in comparison with equity world. Which may be surprising for some investors...

Annualized Sharpe Ratio (Rf=0%)

MSCIWNR.DR: 0.4 ; BTC_0.1.DR: 0.9        

If we look at the drawdown behavior, we can also state that the 10% Bitcoin exposure shows less pronounced drawdowns than the MSCI World index.

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Correlation

From a portfolio perspective, correlation between assets is a relevant factor for considering the relevant constituents. We can observe that the overall correlation is positive but rather low.

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From a rolling correlation perspective, we can see that it fluctuates quite regularly. However, since the 2020 Covid crisis it shifted from oscillating around zero to around 0.25. This is a typical effect, which can be observed in other asset classes as well: Correlations tend to increase during market crises.

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Conclusion

From a quantitative perspective, we can state that the investment properties of Bitcoin have not significantly changed since 2014 except a higher average correlation with equity world since 2020. The current drawdowns (depth, length) and performance are within historical boundaries, so we cannot observe a systemic increase in risk of Bitcoin as an investment.

In terms of risk/return a Sharpe Ratio of 0.9 for Bitcoin is an attractive offering when compared with other assets. So, investors will of course derive their own conclusions and for Bitcoin critics this analysis may not matter at all. However, to answer the initial question:

Is Bitcoin having favorable properties as an investment vehicle and is it still a reasonable component of a diversified portfolio?

In our opinion as of today the answer should be yes.


>>Looking Forward

There are many other questions, which arise in the context of crypto and its impact on asset management, which we will follow-up in upcoming articles.

Kerstin Raclet

Landesgesch?ftsführerin Rheinland-Pfalz und Saarland, Wirtschaftsrat Deutschland

1 年

Thank you, dear Felix for sharing.

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