Robeco: Bitcoin As An Asset Class

The best example being the ongoing depreciation of the Chinese yuan, which persuades the Chinese to circumvent capital controls by getting capital out of the country using bitcoin. But also political uncertainty (US elections, Brexit) and the extremely accommodative stance of central banks are mentioned. Hence, when it comes to explaining its price movements, bitcoin is increasingly treated as an asset class. But, how does bitcoin stack up as such?

Size

To get an idea, I first looked at some general features of traditional asset classes, like size, risk and return. Let’s start with size. At a price of USD 700 the ‘market cap’ of bitcoin equals roughly USD 11 billion. While that’s surely a significant number, it’s nothing compared to the value of traditional asset classes. This is shown in the graph below, which is derived from the (well-recommended) research by Doeswijk, Lam and Swinkels (2014) on the value of the global multi-asset market portfolio. The chart shows the investable market capitalization for the major asset classes. For example, the total market value of global equities is approximately USD 40 trillion (or 40 000 billion), which means that equities have a market cap that is 3600(!) times bigger than that of bitcoin. But even the value of the ‘smallest’ of the major asset classes enclosed in the global multi-asset portfolio, high yield bonds, eclipses the value of bitcoin. The market cap of high yield bonds, at USD 1715 billion, is still 156 times bigger than that of bitcoin. If bitcoin were added to the global multi-asset portfolio it would represent just 0.01% of total market value.

Risk and return

More risk equals higher return. Long-term, this tends to hold for traditional asset classes. But what about bitcoin? The chart below shows the average annualized return of bitcoin and of traditional asset classes since July 2010 (when bitcoin started trading on an exchange). Over this period, bitcoin’s annualized return is an incredible 325%. Such a massive average return suggests that bitcoin is pretty different from traditional asset classes. But we should take into account that bitcoin’s history is very brief, long-term data are not available. In addition, traditional asset classes can record pretty incredible short-term returns as well. Between October 1998 and March 2000 the NASDAQ Composite realized an average annualized return of 144%. Still, 325% is pretty extraordinary by any standard.

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