Bitcoin : Bitcoin UBS report
On a standalone basis, using Bloomberg price data indicates that bitcoin’s average annual return since the start of 2013 has been 216%. Comparatively, US stocks and IG bonds have risen on average 16% and 1.6% annually, respectively (the latter suffered from both taper tantrum and the more recent rise in US rates). Over this period, bitcoin has outperformed bonds by a big margin on a risk-adjusted basis, but only very modestly beat stocks. We use monthly returns and standard deviations to calculate the annualised Sharpe ratio for the three assets. We assume the risk-free rate is zero for ease of computation, and given that US T-bill yields were close to zero for the majority of that period. Bitcoin’s standalone Sharpe ratio is 1.25, against 1.17 for the S&P 500 and 0.49 for US IG bonds. These findings are unsurprising given the unprecedented rise in the price of bitcoin.
We looked at how a typical portfolio would have behaved with and without bitcoin. As an illustrative exercise, we constructed two portfolios: 1) a US-centric 60% equity, 40% IG bonds; and 2) a more global version that includes 40% MSCI World, 20% MSCI EM, 15% US IG, 7.5% EM dollar bonds, 7.5% EM Local, 5% US HY and 5% gold. We then constructed two identical portfolios, with the exception of adding a 5% allocation of bitcoin, and reducing the weights of the other assets in proportion to their original weight. We used total returns and rebalanced our portfolio monthly.
Our results are interesting (Figures 13 & 14). First, the clear implication is that adding a 5% allocation of bitcoin to our sample portfolios would have increased returns considerably, by 11pp annually, roughly doubling the overall return for the US portfolio and tripling that for the global portfolio. Second, the standard deviation of the portfolios would have risen substantially too, doubling in both cases. However, this was not enough to deter an improvement in the overall Sharpe ratio for the portfolios after bitcoin was added, albeit small in the case of the US portfolio. This makes sense given that the standalone Sharpe ratio for bitcoin was higher than both portfolios before inclusion, so even if there were no diversification benefits whatsoever, the inclusion of bitcoin would have increased the ratio.
However, historically there have been meaningful diversification properties. Bitcoin’s correlation with other asset classes has been, according to our analysis, close to negligible (Figure 15). This was also seen in the maximum drawdown calculation for the portfolios, which barely changed despite adding a highly volatile component. Therefore, adding bitcoin to a typical portfolio would have had a favourable impact on both absolute and risk-adjusted returns for the period considered.
But there are also natural limitations, which could restrict the connection between the past and the future. The current market capitalisation of bitcoin is roughly $130bn (down from as much as $325bn in December 2017). As a purely illustrative exercise, if bitcoin prices were to increase at a similar pace as they have done since 2013, this would imply a valuation of $7.8trn by 2021, without accounting for the increase in supply which would result in an even larger valuation. Not only does this dwarf the market capitalisation of the world’s most valuable company, Apple Inc, by almost 10 times, but it is also roughly five times the total volume of US money in circulation.
*There is no certainty on whether bitcoin’s 2013-18 performance is likely to be repeated; the potential portfolio benefits implied by our calculations are purely illustrative
Bitcoin
Bitcoin is a distributed, worldwide, decentralized digital money. Bitcoins are issued and managed without any central authority.
FindCrypto scans the web for the latest Bitcoin news, so you can find all the latest and breaking news in one convenient location.Author: zachmoe
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