How Important is the Bitcoin Rally?

Bitcoin

Bitcoin, we’ve all heard of them, and some of us even have a few. Personally, I’ve been a huge fan of the coin since early 2011 when the coins were trading at less than $5. I actually distinctly remember picking a number of them up at below the $1 mark. Where are they today? A single coin is currently trading for roughly $1200 – that’s some serious appreciation.

Bitcoin Chart

Bitcoin since 2013

BTC-e has been tracking the price of bitcoin and placing it into a quandl data set since the middle of 2013 even though the coin has been around since 2008, so we will work on this time scale to address just how investable BTC is.

Firstly, that chart looks pretty intimidating. It shoots up 700% in a mere six months and then goes into a nice decline until 2016 where it seemed to have “found its bottom” and has slowly been on the rise ever since.

Log Scaled view of Bitcoin since 2013

Log Scaled view of Bitcoin since 2013

You can see it better here, but it’s obvious that BTC has beaten both the S&P 500 and a screener that encompasses all of the companies found within our system, but does that make it a good investment? Sorta, kinda, not really – okay, let me explain.

Backtest report of Bitcoin performance.

Quantitative Look at Bitcoin performance

Heading over to the backtest report we can change the benchmark from the S&P to Bitcoin where we will be given a bit more data on how BTC performed quantitatively. Both Henry and I expected the Sharpe ratio to be fairly high due to the massive price increase in the coin, but it has one of the lowest Sharpe ratio’s I’ve ever seen. This initially confused me until I moved my gaze up just slightly and saw that bitcoin is sporting a 66% monthly standard deviation! That’s absolutely insane.

The next question you need to ask yourself as an investor is, what value does Bitcoin provide? It is an open source style currency that just about anyone can make, and trust me there are hundreds if not thousands of bitcoin alternatives out there. Many of these alternatives actually use more advanced protocols and function better than the original Bitcoin. Meaning that bitcoin doesn’t really provide any value alone other than being the first to market. Yes, you can purchase bitcoins at ATM’s all over the country at a 20% premium and some retailers have begun accepting them as a cash alternative, but that number isn’t really big enough to warrant this valuation.

So why are people buying Bitcoin? Why have I bought into bitcoin? It’s because we aren’t investing in the currency, but rather the idea of a decentralized peer-to-peer economy. This idea will never really come to fruition because of the sheer size of the world economy, but it’s nice to entertain among small groups of enthusiasts.  Bitcoin’s price is also incredibly news driven. As more media picks up on the bitcoin story, whether it’s to simply describe the currency or talk about its virtues, the price begins to quickly move upward. These spurts of news tend to be short lived, and, as the media moves onto different stories, the retail market for bitcoin tends to fall away leaving a fairly small group of enthusiasts who continue to buy and hold the coin.

This rally is a bit different because the Winklevoss twins are currently proposing building a bitcoin ETF to be traded on the tried and true security’s markets. This ETF will be going before the approval board next month to make their case which has resulted in extended news coverage and added speculation around the coin – pushing the price higher. Now, in the event that this ETF is approved there will be a legitimate value added to Bitcoin, and the price is likely to climb even further. In that same breathe it may push people, specifically enthusiasts, away from the coin much like it did when New York released the Bitcoin license during the last major rally, effectively killing the innovation in the space and pushing the price back down to “normal” levels.

All in all, bitcoin is incredibly risky and isn’t something you buy to “invest” in, it’s something you buy because you truly believe in the idea that created it. You believe that the world can be improved through some aspect of the coin, whether it’s through the elimination of centralized currency systems(not going to happen) or through the implementation of blockchain technology in securities transactions(actually getting close to being feasible), and you don’t care about the price. I may have purchased coins at sub $1, and could sell those coins today for a huge profit, but that was never the goal. I’d buy bitcoins at $1/coin or $10000/coin, and I’ll continue to hold them until the end of time simply because it’s something I truly think can change the world.

About Tyler McCain

A student of finance at Georgia State University, Tyler has had a passion for the world of finance for as long as he can remember. Joining the Equities Lab team in 2015 he attempts to juggle the perfect mix of school, work, and giving back to the community. When he isn't working at Equities Lab he can often be found helping teach programs at the Rosen Family Foundation - a non-profit that teaches financial literacy to middle and high school students.

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.