Bitcoin
has gained 158% in dollar terms since January 1, 2019. Gold, to which it is always compared, gained only 36%. The difference is large enough to be seen by the eye.
When we compare the S&P500 with bitcoin in terms of returns, we see that the S&P500 has increased by only 17% since the beginning of last year. That’s only 1/10th of the return that bitcoin provides. The inclusion of bitcoin in mutual funds by institutional investment companies depends on the decision of the SEC, which we can call the CMB of America. So, after this decision is made, will the funds start adding bitcoin to their portfolios?
When making an investment, professional investors don’t just look at its past returns. Return and expectation are of course very important, but they calculate the return on the basis of its volatility, that is, its risk. The return against one unit of volatility is looked at. This is called the “Sharpe Ratio”. Funds are not formed by a single financial asset, but by making baskets, that is, by multiple financial assets. This expectation lowers the return slightly. However, they protect themselves in this way, both from individual losses and because the volatility calculated together will decrease.
The most common question asked by cryptocurrency investors is “what will be the price of bitcoin? Which altcoin will fold?” is. The overlooked issue is the volatility of bitcoin. So if we predict that bitcoin will increase by 20 percent after a month, would it be a good investment?
When we say risk here, we do not mean the risk of questioning the future and existence of bitcoin. Bitcoin has already successfully completed this test. The risk mentioned is daily, monthly and yearly price volatility. The pricing of bitcoin in the 9000-9800 band for the last week has been negatively affecting investors and it seems that this price movement does not meet the expectations of the investor. Bitcoin has been in a high angle upward trend since March 13, but this trend does not excite investors, so to speak.
At this point, it is estimated that bitcoin has fallen into a dilemma. In order to receive investment from institutional firms and a wider base, bitcoin’s daily movement needs to decrease and it needs to continue its upward trend in a less volatile way. However, since such a rise will not satisfy the current crypto money investor, there may be an exit from bitcoin and this will reflect negatively on prices. Now let’s calculate the sharpe ratios of S&P, gold and bitcoin, that is, their returns per volatility.
Sharpe’s Ratio = (Average Daily Return / Variance (Volatility)) x SquareRoot (Trading Day)
Although Bitcoin
is much higher than gold in terms of return, gold seems to be more advantageous in terms of sharpe ratio. However, we see that it has a much better ratio than the S&P500. Bitcoin is definitely investable for both funds and individual investors. It is worth noting here that gold is not a better investment than bitcoin, but that the expectation of higher returns from bitcoin is wrong. In order for Bitcoin to fold itself, it needs to attract large investment funds after regulation. There is no question about the return of Bitcoin. It is possible to say that an asset that increases 2.5 times in a year is very satisfactory in terms of return. However, if the volatility it has decreases, it is certain that bitcoin will attract much more investment.
One of the well-known mistakes is that there is a correlation between bitcoin and gold. Since they both have a rising trend, it’s natural to make this mistake. However, when we look at the correlation of their returns, we see that there is a -0.02 correlation between them. This shows that gold and bitcoin can be a nice basket.
Gold was much more volatile in the 1980s. The fact that it has had a steady increase in recent times does not mean that its volatility will be low from now on. In fact, even if you are an investor who does not like risk, it is possible to reduce your risk by adding some bitcoin to your gold investment.
In short, a financial asset should not be invested just by looking at its return. We see that this volatile structure increases as we move down the
cryptocurrency
list on coinmarketcap.com. It is observed that investors invest in low-volume altcoins with the hope of high returns. But it’s also worth considering whether its payoff against volatility makes sense. As Bitcoin starts to be more stable, it is possible to say that it will take place in our lives in a much stronger way in the future.