Solidifying the Investment Thesis for Bitcoin with Statistical Data and Qualitative Metrics
The store of value narrative for Bitcoin has been gaining a solid amount of traction over the years, notably naysayers have used the supposed lack of solid data to deny the benefits of Bitcoin in an investment portfolio. New research from VanEck suggests that this is completely wrong, as there are various measures – including statistics – that reinforce the store of value narrative, October 8, 2019.
Formulating the Ultimate Proposal
Rule #1 of investments is to never put all your eggs in one basket i.e. diversification. This helps reduce overall portfolio risk and standard deviation of the portfolio. Diversification can be achieved on on many levels: diversifying within sectors in one asset class is the first layer, and diversifying across asset classes is the next layer.
When diversifying across asset classes, the most popular measure of evaluating the efficacy of the strategy is to look at correlation amongst the assets.
According to research from VanEck, Bitcoin has no more than .05 correlation with any traditional asset class. This includes stocks, bonds, gold, real estate, oil, and currencies. In fact, Bitcoin has negative correlation with oil and emerging market currencies.
On an aggregate level, the correlation matrix between these asset classes and Bitcoin proves that it is a game changer, and most certainly a perfect hedge against the assets of today.
Differentiating Bitcoin and the Need for Infrastructure
Bitcoin, currencies, gold, and other metals are assets of monetary value. They derive their value from their ability to serve as money, as well as psychological and social factors.
Assets like real estate, stocks, and bonds have intrinsic value, as their price and value are distinguishable due to underlying cash flows that back these assets.
Bitcoin’s low correlation with bonds and equities makes it a much more efficient hedge against sovereign power relative to Gold, which is quite highly correlated to U.S. Treasury bills.
On the flipside, there are a lot of negatives, as with anything in this world. The lack of “plumbing” or lack of financial infrastructure has led to Bitcoin being essentially cut off from global capital markets.
Cryptocurrency exchanges quadruple up as exchanges, custodians, OTC brokers, and clearance houses. Better infrastructure will result in better market penetration.
The important takeaway from this is that the shortcomings can be easily overcome, but the benefits cannot be replicated elsewhere. Bitcoin not only serves as the best macro hedge, it is also the best performing asset of the last decade.
It wouldn’t be a stretch to say that it is financially irresponsible to not have investment exposure to bitcoin.