Investors today are facing many challenges in financial markets. Bitcoin, as one of the new investment assets, received increasing attention. This research paper analyzes the performance of Bitcoin from 2013 until today, with a special focus on its performance during the pandemic. We found that including Bitcoin in a portfolio would reward investors with higher risk-adjusted returns, because of the low correlations of Bitcoin with other financial asset classes.
The paper is structured as follows. The first section analyzes the performance of Bitcoin and other financial assets from 2013 through 2020, with a focus on the correlations across financial assets. The second section compares the performance of 60/40 portfolios with different sizes of allocations to Bitcoin. Taking 60/40 portfolio with and without Bitcoin allocation as examples, section three discusses the impact of Bitcoin on efficient frontier. The last section concludes with key takeaways.
As a fintech innovation, crypto asset values are increasing exponentially. Invented in 2008, Bitcoin now has a market capitalization at $117.81B. Would investors benefit from adding crypto assets into their investment portfolios? What would be a meaningful allocation? In this report, we will analyze and compare the performance of traditional 60/40 portfolios with 1%, 5%, 10% and without allocation to Bitcoin. Table 1 shows the financial assets included in our analysis.
Figure 1 shows the performance of financial assets and of Bitcoin since April 2013. The price of Bitcoin explodes in 2017 from $1,037 at the beginning of that year to the peak of $18,928 in December. Figure 2 shows prices of financial assets scaled by 90-day rolling volatility.
While Bitcoin has attractive returns, it also shows a frightening volatility, which is around 5 to 10 times higher compared to other financial assets (Figure 3). There are many factors leading to the high volatility of Bitcoin, including speculations, news events, and regulations. But does it mean investors should not consider Bitcoin for their investment portfolios? To answer this question, we first examine the correlations across financial assets.
Figure 4 shows the 90-day rolling average correlations of one financial asset with the others. Bitcoin suffers a significant shock caused by the COVID-19 and moves in tandem with other financial assets in March 2020. However, we believe this phenomenon would diminish gradually, as we find that correlations usually increase under global-wide market shocks like the COVID-19 pandemic (for details: Which Portfolios Outperformed during the Covid Crisis?). In fact, before the global financial market turbulence early this year, Bitcoin has very low correlations with other financial asset classes (Table 2).
The reasons that Bitcoin could be traded as an uncorrelated asset are specific drivers of its return. As one of the crypto currencies, the price of Bitcoin is influenced by factors such as the technology development, regulatory and the market adoption. Because of the nearly zero correlations of Bitcoin with other assets and the modern portfolio theory, we expect a portfolio with allocation to Bitcoin would bring a higher risk-adjusted performance, which we will analyze in the following section. Financial assets like equities, bonds and commodities are driven by factors such as economic growth and inflation, as analyzed in our report Impact of Macroeconomic Factors on Financial Assets and Portfolios. Because of the shared drivers among traditional financial assets, they become more related to one another. Table 3 summaries the performance of assets during our study’s time frame.
To evaluate the impact of Bitcoin on a portfolio, we choose a traditional 60/40 portfolio as the benchmark and compare it performance with performance of portfolios with 1%, 5% and 10% allocation to Bitcoin.
Figure 5 shows the performance of portfolios with different levels of allocation to Bitcoin. The results are consistent with our expectation that we can achieve superior risk-adjusted returns by allocating even just a small percentage of investment to Bitcoin. This is mainly due to the low correlation of Bitcoin with equities and bonds and its strong performance in recent years. Figure 6 shows the portfolio drawdowns for a pure 60/40 portfolio and 60/40 with a 5% allocation to Bitcoin.
Table 4 shows portfolio performance stats. Although adding Bitcoin to a portfolio increase the volatility, it brings better risk-adjusted returns, with a Sharpe ratio of 1.38 for the portfolio with 10% allocation to Bitcoin, 54% to SPY and 36% to AGG. Allocations to Bitcoin enhance portfolio returns without introducing dramatic volatilities. Another reason we think that makes Bitcoin a valuable contributor to a portfolio is its resilience to macroeconomic environment (Figure 7). Similar to other assets, Bitcoin faces the market shock caused by COVID-19. But it shows resilience to such shocks. For example, the portfolio with 5% allocation to Bitcoin reaches a higher Sharpe ratio at 0.49 with a slightly increase of volatility compared to 60/40 portfolio (Table 5).
As some investors are still not familiar with digital assets like Bitcoin, they may under allocate to this asset class. According to Modern Portfolio Theory, an optimal portfolio could be achieved with a balance of risk and return. Portfolios that lie on the efficient frontier are preferred as they provide the highest returns with given levels of risk or lowest risks with defined returns. Figure 8 shows the efficient frontiers of portfolios without (in blue) and with (in red) 5% allocation to Bitcoin. The risk-adjusted return improves obviously by including Bitcoin in a portfolio. For example, the Sharpe ratio increases from 0.82 to 1.34 by allocating 5% Bitcoin to a portfolio investing in bonds (AGG) only. Bitcoin itself may seem risky, but with a well-designed allocation and trading strategy, it could significantly increase a portfolio’s risk-adjusted return.
The previous results highlight the following key insights:
This article analyzes the cryptocurrency market capitalization for the top 20 cryptocurrencies. In particular, it shows the composition of market cap by cryptocurrency, how it evolved over time, and how it compares to traditional asset classes like stocks and bonds. The research finds the following:
The article is structured as follows. The first section analyzes the market cap composition for the top 20 cryptocurrencies over time. The second section compares the crypto market cap to traditional asset classes. The final section concludes.
Table 1 shows the top 20 cryptocurrencies by market capitalization considered in this research.
As the figure shows, the current total market cap for all the cryptocurrencies is around $111 billion. Figure 1 shows the distribution of the crypto market cap for the top 20 cryptocurrencies. As it can be seen from it, over 80% of the total market cap is in the top 3 cryptocurrencies, with Bitcoin having 57.63% of the total.
Figure 2 shows the evolution of the crypto market cap in billion of US dollars over time.
As it can be seen from it, the cryptocurrency market cap is very volatile, in a similar way to the crypto prices. It went in fact from around $1.5 billion in April 2013 to $111 billion in January 2019, an increase of around 100 times in almost 6 years.
Figure 3 shows the composition of the market cap by cryptocurrency.
As the figure shows, Bitcoin lost its dominant market share during the analyzed period, going from around 95% of the total market cap in April 2013 to around 57.63% in January 2019. Cryptocurrencies that have been quite successful are Ethereum, used in ICO through ERC-20 tokens, and Ripple. Both in fact have managed to achieve around 12 percentage points in market share during the analyzed period.
The next section puts the crypto market cap into perspective by comparing it to traditional asset classes.
Figure 4 shows the market cap of Bitcoin and cryptocurrencies compared to traditional asset classes.
As the figure shows, despite their tremendous growth in the past 6 years, cryptocurrencies and Bitcoin still have a very small market cap compared to traditional asset classes. In particular, their market cap is still lower than Amazon, currently the largest publicly listed company by market cap in the US stock market.
This data shows that crypto is an emerging technology that has the potential to become a new asset class, but it still has a relatively small market cap.
Crypto is a new technological innovation that has experienced tremendous growth in the past 6 years in terms of market capitalization. Nonetheless, it is still quite small compared to traditional asset classes like equity and bonds. We will probably need another 5 to 10 years before considering crypto a relevant asset class in terms of market capitalization.