Insights

Insight

Emerging cryptocurrencies are quickly becoming an institutionally investable asset class. It is liquid, transparent, transactional, uncorrelated, and with bounded volatility. It is also programmatically and structurally geared toward disinflation and growth, delivering secular appreciation. For institutional investors on the cutting edge, portfolios should position to have structural exposure to the asset class via cryptocurrency or raw processing/hashing capacity.
Analytical Basis for Cryptocurrency as an Asset Class

Investible

Global bitcoin trading volume is currently at over $1Bn, with substantial liquidity available in USD, EUR and GBP, with the majority of liquidity in Yuan. The absolute number of bitcoins is increasing, but also fractionalization to 8 digits is driving liquidity from routine transactional demand.
Global Daily Bitcoin Exchange Traded Volume
Global Bitcoin Exchange Traded Volume Share by Currency
Used as an Investment

Transactional

Bitcoin is quickly becoming a transactional currency with depth of supply, multiple liquidity pools, and coin supply increasing over the last few years. Exchanges are advanced, deep, with market maker capability and expertise to clear large orders. Security is improving as regulation meets technology and best practices improve.
Trading Relative to Transacting
Global Daily Bitcoin Volumes: Trading ($, €, £) Relative to Transacting
Daily Bitcoin Transactional Volume (Annual Average)

Liquid

Significant daily liquidity on par with Gold bullion and much better than some established institutional asset classes such as a REIT ETF. Wallet-holder is increasingly allocating to value appreciation over transactions as faith in asset class grows. Most of the monetary supply will be on the market by 2020. Driven by growing complexity of mining and physical limitation of IC platforms beyond 10nm.
Daily Bitcoin Transactional Volume (Trailing Quarter Average)
Bitcoin Average Annual Rate of Supply Increase
Predictable Supply: Number of Bitcoin

Uncorrelated

Demonstrated low correlation with existing institutional asset classes creates an opportunity to further diversify a robust portfolio and deliver risk adjusted return. Bitcoin behaves like a commodity, but with the benefits of highly transactional functionality. Price drivers are related not just to supply/demand, but of difficulty in mining and compensation for transaction verification services. Arguably, the commodity should/could be priced on the marginal cost of production.
Uncorrelated to Emerging Markets Currencies
Uncorrelated to Commodities (Gold)
Average one year Rolling Correlation Since the Start of 2011

Low volatility

Bitcoin’s volatility has been consistently declining over the past several years. Current volatility is roughly in line with that of the oil price.
Decreasing Volatility of the Bitcoin Price
Bitcoin Daily Volatility Over the Trailing Year
Weekly Volatility

High Risk-Adjusted Returns

Bitcoin has been achieving consistenly high returns since its inception. Risk-adjusted returns are particularly impressive, with Bitcoin’s Sharpe ratio on average higher than that of any other major asset class.
Bitcoin: Compound Annual Returns
Growth $10,000 Investment from December 2011 to December 2016
Growth $10,000 Investment from December 2013 to December 2016
Sharpe Ratio