A new report argues that bitcoin should be considered the first in a new kind of asset class.
The paper was produced by digital currency exchange and wallet
startup Coinbase and ARK Invest, an investment management firm that
specializes in disruptive technologies and offers financial products
tied to bitcoin.
The white paper,
written using data from Coinbase, TradeBlock, the S&P 500 Index and
several additional industry benchmarks, outlines four approaches to
characterizing assets before laying out the argument that traditional
investors should view "cryptocurrency" as an entirely new asset class.
ARK Invest analyst Chris Burniske, who co-authored the report,
said that the project started as an exploration between the two
companies of how people use gold to buy bitcoin.
Burniske told CoinDesk:
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"We
realized this is a bigger story than comparing bitcoin and gold. This
is about bitcoin and cryptocurrencies maturing into their own asset
class."
The new report builds on
a 1997 paper
about asset class characterization, which breaks down assets into three
categories: capital assets, consumable/ transformable assets, and
store-of-value assets.
Burniske and co-author Adam White, who serves as vice president for
Coinbase, go on to define four distinct characteristics of traditional
asset classes, positioning bitcoin both within and beyond
those traditional definitions.
Liquidity and distinctness
The first characteristic of an asset class that the report
outlines relates to what it calls “investability”. This, according to
the report, pertains to whether an asset class provides sufficient
liquidity and opportunity to invest.
In the case of bitcoin, ARK Invest and Coinbase analyzed bitcoin
exchange trading volumes from July 2011 through the first quarter of
2016 to determine the liquidity available to investors.
Using data obtained from Bitcoinity and Tradeblock’s XBX Index, the
paper shows steadily increasing volume, reaching as much as $1b per day
through April of this year – though it acknowledges that this high
figure is driven by self-reported figures not subject to third-party
validation.
Next, the report defines a traditional currency relative to its
“politico-economic features”. To be an asset, the report argues, the
entity needs to have a unique profile that “arises” from its value,
governance and use cases.
In each case, the report draws distinctions between bitcoin and traditional asset classes.
For example, bitcoin’s operational model, in which transactions are
broadcast and verified on an open network, results in a predictable,
"mathematically metered" release of the asset. By 2140, 21m bitcoins in
the market will exist – by comparison, roughly 15.6m bitcoins have been
created to date.
According to figures provided in the paper, that’s distinct from both
the US monetary base and gold supply, which increase at sporadic rates
based on data from the Federal Reserve Bank of St. Louis and Number
Sleuth’s "All the World’s Gold Facts".
The report argues:
"Compared to bitcoin, no asset has evolved from concept
to billions of dollars in stored value so quickly. Moreover, no asset in
history has followed such a predictable supply trajectory."
Sufficiently different
The third trait used in the report to define traditional assets and
help position cryptocurrencies as a new asset class relates to “price
independence”, a characteristic that suggest how assets should exhibit a
low correlation on returns relative to other assets in the marketplace.
Put more simply, an asset needs to be sufficiently independent from the value of other existing assets.
Using data sourced from Bloomberg and TradeBlock, ARK Invest and
Coinbase compare bitcoin with the S&P 500, along with data on US
bonds, gold, real estate, oil, and emerging market currencies.
“Strikingly, bitcoin’s price movements have been separate and
distinct from those of other asset classes during the last five years,”
the report states. “It is the only asset that maintains consistently low
correlations with every other asset.”
Lastly, ARK Invest and Coinbase argue that the first three
characteristics of traditional asset classes need to differentiate the
risk-reward profile of the entity, leading to easily defined returns and
a degree of volatility.
Using the Sharpe Ratio, which measures the returns on an investment
per unit of risk, the authors of the report analyzed a five-year span
from May 2011 through May 2016.
With data sourced from the XBX Index, the report shows that,
during the five-year period, the average daily volatility compared to
the previous year decreased from about 10% to about 4%.
Bitcoin’s daily volatility in May 2016 was roughly a third of that
figure compared to five years ago, and 24% less than at the start of May
2015, according to the paper.
Image via Shutterstock
Ernst & Young revealed today that multiple bidders claimed 24,518
BTC (worth roughly $16m at press time) as part of a scheduled bitcoin
auction that began on 20th June and ended on 21st June.
