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The very first pricing of bitcoin can track back to September 2009 when it was $0.07 cents which was calculated by New Liberty Standard. As of 26 June, bitcoin price hits $13,000. If $1,000 was invested in bitcoin at an exchange rate of $0.07 cents, the accumulated return will have been more than $17 billion. Isn’t that one of the most incredible investments in the perspective of return? To justify bitcoin’s property of being mature investment, this article compares bitcoin with comparatively mature U.S stock market in terms of absolute return, volatility and Sharpe Ratio. By observing their performance at the same duration starting from 13 December 2014 and ending at 19 May 2019, it is concluded that bitcoin can serve as a mature investment because it has better compensated investors for high risk with satisfactory return rate.
【Rate of return】
The methodology is to compare the accumulated change of price and annualized return between bitcoin and U.S stock market within the same duration.
To simplify the analysis, I assume that the duration of observation starts from 31 December 2014 and ends on 19 May 2019. That being said, the duration is 4 and a half years.
To compare bitcoin with U.S stock market, leading index NASDAQ 100 Index, S&P500 and DJIA are chosen because they are believed to represent the overall performance of the U.S stock market. Along with the stock index, it is to observe the performance of 6 tech-focus U.S stocks who are leading the market cap, they are Netflix, Amazon, Apple, Intel, Cisco, and Microsoft.
Per the St. Louis Fed Economic Research, the performance of these three indexes has been decent and NASDAQ 100 Index records a better rate of accumulated increase than DJIA and S&P500. Nevertheless, bitcoin outperforms these indexes. According to CoinMarketCap, the price of bitcoin had been increased by 2,238% since 31 December 2014.
Source: CoinMarketCap, St. Louis Fed Economic Research
Comparison with major stock index might not give strong evidence to prove the investability of bitcoin. Therefore, benchmark with high market cap U.S tech-focus stock on their annualized rate of return is here to state. Within the duration starting from 31 December 2014, bitcoin offers a much higher annualized rate of return of 99.1%, which is leading these tech giants. Per the Nasdaq, among these 6 stocks, Netflix gives the best return of 56.14% while intel is 8.46%. To notice, Netflix can be a better benchmark to bitcoin because his market cap is much close to bitcoin as of 19 May 2019, though Netflix is not yet among the Top 10 in terms of market cap.
Source: CoinMarketCap, Nasdaq
【Volatility】
The absolute rate of the price change and the annualized rate of return reflect the profitability of the investment, but they barely indicate the risk related to the volatility. By understanding the risk, it becomes visible if the return rate is proportional to the volatility of the return. When there is a positive relationship, higher return rate usually entails a higher risk of return volatility to undertake.
Therefore, to validate the degree of risk of both bitcoin and U.S stock market, it is to calculate their annualized standard deviation on the daily change of price.
Where X is the daily change of price
is the average change of daily price within each year
N is the number of X being counted
It is assumed that the higher the standard deviation, the higher the volatility which thus entails a higher risk of the underlying investment.
Shown in the chart, throughout the 4.5-year duration the annualized return rate of bitcoin each year significantly outperforms these leading stocks except that in 2018.
In terms of the volatility, from 2015 to 2019, bitcoin has demonstrated higher volatility than these tech giants each year. To point out, the trend of bitcoin’s return rate volatility is extremely similar to each stock benchmarked throughout the whole duration (except 2017).
Source: CoinMarketCap, Nasdaq
Source: CoinMarketCap, Nasdaq
【Sharpe Ratio】
To justify if bitcoin is a mature class of investment, Sharpe Ratio of bitcoin and these leading tech stocks is used. It is assumed that Sharpe Ratio reflects the unit return rate per unit of risk and therefore a comprehensive ratio taking into account both profitability and risk.
Where E(Rp)is the return rate
Rf is the risk-free rate
Σp is the standard deviation of return rate
To simplify the model, Rf is assumed to be 0. It can be drawn from the chart that in 2016, 2017 and 2019 by now the Sharpe Ratio of bitcoin each year is competitive and seemingly outperforms most of these tech giants.
That being said, Bitcoin has been compensating investors much better than most of the U.S stocks for their exposure to the risk with a strong return.
Source: CoinMarketCap, Nasdaq
To summarize, by comparing bitcoin and both the typical stock index and leading tech-focus stocks, it is found that bitcoin has been strengthening its property of being a much more mature class of investment. By generating significantly superior return rate to compensate the high risk due to prominent volatility, bitcoin seems to become a better alternative to stock because it is proved to be living up to the risk-prefer investors’ expectation through both strong return and decent Sharpe Ratio.