In the educational piece titled "Is Bitcoin Too Risky? Whenever the Bitcoin is Mentioned in Financial Pop Media, Ignorance Ensues," I reviewed the many misconceptions that "so-called" professional investment types had about bitcoin, its relative risks and rewards. I called out the Financial Times, the London Business School and Money Magazine as basically not knowing what they hell they were talking about. Now, we will take the analysis a step further for those investors who want to get their feet a little more than just wet.
Bitcoin is a volatile asset. This is likely the reason why amateur investors see it as risky - it is. The issue is that you don't choose investments based solely on risk, or at least you shouldn't. You should choose on risk-adjusted return - or - the amount of return you get given the amount of risk you take to achieve said return. Using that metric, Bitcoin is the unparalleled king amount major asset classes over the last 7 years. In "Is Bitcoin Too Risky?" I measured the risk-adjusted return of Bitcoin and compared it against the S&P 500 and the British Pound.
Several clients have asked me how Bitcoin compares to other asset classes, so here we go. Below is BTC returns measured since 2011 and expressed through the Sharpe ratio, a formula that measures risk adjusted return. As you can see, BTC (bitcoin) is the third best performer out of the bunch. Pretty good, eh?
But... There's a problem with graphic above. You see, the Sharpe ratio penalized volatility (expressed as standard deviation) as risk. Some of us actually like upside volatility, and most of us dislike downside volatility. This is an example of Bitcoin's upside volatility (gains) that were actually penalized by the Sharpe ratio...
If we use a more refined method, such as the Sortini ratio, that only penalizes for downside volatility, we get a very different result...
| Time Period | BTC Price | Yearly Returns | Risk Free Return | Bitcoin Excess Return | Negative Excess Return |
| 1/1/2011 | $ 0.32 | 1.97% | |||
| 1/1/2012 | $ 6.81 | 2009.01% | 1.91% | 2007.10% | 0 |
| 1/1/2013 | $ 13.74 | 101.76% | 2.86% | 98.90% | 0 |
| 1/1/2014 | $ 830.50 | 5944.40% | 1.88% | 5942.52% | 0 |
| 1/1/2015 | $ 285.12 | -65.67% | 2.09% | -67.76% | -67.76% |
| 1/1/2016 | $ 435.40 | 52.71% | 2.42% | 50.29% | 0 |
| 1/1/2017 | $ 1,015.54 | 133.24% | 2.42% | 130.82% | 0 |
| Average | 1360.31% | ||||
| BTC Standard Deviation | 23.77952001 | ||||
| Bitcoin Sharpe Ratio | 0.572051908 | ||||
| Min Acceptable Return | 2.42% | ||||
| Downside Risk | 0.276624445 | ||||
| Average Excess Return | 1360.31% | ||||
| Sortino Ratio | 49.18 |
Since 2011 (I know the charts say 7 years, but it's 6), Bitcoin has been no less than 9.5x greater than it's closest competitor (the LSE, which rates highly due to relatively low volatility) and clearly outclasses every other asset class and asset in the study.
The London Business School, the Financial Times and Money Magazine, among many other "so-called" professional finance types really need to subscribe to Reggie Middleton's BoomBustBlog in order to understand what this Bitcoin thing is really about.
Next up, I'm going to show funds and professional investors how to add Bitcoin to your portfolio to juice your returns AND reduce your overall risk. Then we will work on customizing your risk-adjusted reward with Veritaseum smart contracts. Heady stuff! Stay tuned.
Subscribe to BoomBustblog.
Learn more about programmable bitcoin "smart contracts" at Veritaseum:
- What is Veritaseum? A Layman's Explanation
- The Onramp to Peer-to-Peer Capital Markets
Learn more about Reggie Middleton here...
...and Pathogenic Finance.