Bitcoin Price Return is a stand-out asset for its returns compared with other asset classes despite its volatility, says NYDIG.Bitcoin is the best-performing asset for returns despite its volatility, according to the New York Digital Investment Group (NYDIG).
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In an analysis published on Oct. 11, Greg Cipolaro, Global Head of Research at NYDIG, said that Bitcoin BTC$64,308 “stands apart from the crowd” for its returns and compared it to other asset classes using the Sharpe ratio.
The ratio is used in finance to evaluate the performance of an asset relative to its risk. Specifically, it calculates the ratio of excess returns to the volatility of those returns, with a higher Sharpe ratio indicating better risk-adjusted performance.
Cipolaro provided the Sharpe ratios of other asset classes, including equities and bonds, over different holding periods using monthly total returns to create rolling Sharpe ratios and presenting the most recent reading.
“Bitcoin ranks favorably compared to nearly every asset class on every metric over every time frame,” he concluded from the data.
He noted that gold had a slightly higher Sharpe ratio over the past 12 months but said the two were so close that they were “splitting hairs,” he said.
Cipolaro was challenging a Goldman Sachs note on Oct. 7 that claimed despite being up 40% year-to-date, Bitcoin’s performance was not sufficient to compensate for its volatility.
“This analysis shows the contrary, that the risks (price volatility) that Bitcoin investors endure are more than made up for in terms of returns.”
Cipolaro also noted that while Sharpe ratios are useful for comparing risk-adjusted returns, absolute returns are what ultimately matter for meeting financial obligations.
He also pointed out that this metric doesn’t capture all types of risk an investor might face, such as censorship or seizure of assets.
In a report released earlier in October, NYDIG analysts concluded that Bitcoin remains the best-performing asset so far this year, even after a “seasonally weak” third quarter.
Bitcoin has traded flat over the past day following a tightly range-bound weekend. It has retreated from an intraday high of $63,150 during late trading on Oct. 13 to trade at $62,560 at the time of publication.
Let’s compare how Bitcoin is different from a commercial bank, which operates as a centralized system. Given a situation where Alice wants to transact with Bob, the bank is the only entity that holds the ledger that describes how much balance Alice and Bob has. As the bank maintains the ledger, they will do the verification as to whether Alice has enough funds to send to Bob. Finally when the transaction successfully takes place, the Bank will deduct Alice’s account and credit Bob’s account with the latest amount.
Bitcoin conversely works in a decentralized manner. Since there is no central figure like a bank to verify the transactions and maintain the ledger, a copy of the ledger is distributed across Bitcoin nodes. A node is a piece of software that anybody can download and run to participate in the network. With that, everybody has a copy of how much balance Alice and Bob has, and there will be no dispute of fund balance.
Now, if Alice were to transact with Bob using bitcoin. Alice will have to broadcast her transaction to the network that she intends to send $1 to Bob in equivalent amount of bitcoin. So how does the system determine if Alice has enough bitcoin to execute the transaction? This is where mining takes place.
Bitcoin Mining
A Bitcoin miner will use his or her computer rigs to validate Alice’s transaction to be added into the ledger. In order to stop a miner from adding any arbitrary transactions, they will need to solve a complex puzzle. Only if the miner is able to solve the puzzle (called the Proof of Work), which happens at random, then he or she is able to add the transactions into the ledger and the record is final.
Since running computer rigs cost money due to capital expenditure, which includes the cost of the rigs and the cost of electricity, miners are rewarded with new supply of bitcoins. This is the monetary system behind Bitcoin, where the fees for validating transactions on the network is paid by the person who wishes to transact (in this case it is Alice).
This makes the Bitcoin ledger resilient against fraud in a trustless manner. While it is resilient, there are still some risks associated with the system such as the 51% attack where by miners control more than 51% of the total computation power and also there can be security risks outside of the control of the Bitcoin protocol.
