Is Bitcoin Beta?
In traditional equity markets, beta is defined as a measure of volatility, or unsystematic risk an individual stock possesses relative to the systematic risk of the market as a whole (the latter of which has a beta coefficient of 1.0).
The difficulty in defining “market beta” in a space like digital assets is that there is no consensus for a market proxy like the S&P 500 or Dow Jones. Since the space is still very early in its development, and bitcoin (BTC) has dominant market position currently (~70%), bitcoin is often viewed as the obvious choice for beta, despite the drawbacks of defining “market beta” as a single asset with idiosyncratic tendencies.
What we seek to accomplish with this piece is a conversation starter around what constitutes “market beta” for digital assets.
Despite its high public market dominance, we think there are drawbacks to considering bitcoin as the digital asset market beta proxy. First, bitcoin is not the entire market, but rather a single idiosyncratic asset. That means it poses unsystematic (e.g. asset-specific) risks that can be mitigated through diversification.
Let’s pause there.
Some may counter the above by noting that bitcoin is still the safe haven asset of the industry — and that if bitcoin were to sell off, there is likely to be a high probability that the rest of the market will sell off as well if confidence is lost in the industry’s largest liquid asset. The below correlation observations over the latest twelve months, 2018, 2017, latest 3 years and latest 5 years show that, with the exception of 2018, correlations between bitcoin and ~90% of the public digital asset market have been moderately correlated rather than highly correlated.
It is important to emphasize that the above correlation comparisons are conducted as of a particular measurement point in time, representing only a limited snapshot and should not be considered as long-term indications of performance (e.g., not many public digital assets existed more than 3 years ago compared to today). Nonetheless, we recognize that the aforementioned data may, in some cases, present a compelling argument for bitcoin also possessing a degree of systematic risk, therefore making it a potential contender for market beta at present.
A second thing worth considering is the structure of bitcoin — a byproduct of absolute scarcity, bitcoin’s upside volatility tends to create a parabolic upward sloping curve, and the asset may currently be experiencing its fourth since 2010 (shown below, log adjusted).
These parabolic ascents make it very challenging to outperform bitcoin during the windows they occur, whether in passive, diversified portfolios or in active management. Thus, the notion of identifying alpha (in the context of beta) can be challenging. Active managers generally need to justify the fees they charge investors by outperforming their benchmark(s), (which are often beta proxies) yet at the same time they should not engage in imprudent risk behavior that can potentially have swift and sizeable negative effects on their portfolios. We saw this temporary relative underperformance in Q2 2019 (see our Q2 2019 Crypto Hedge Fund Report).
Third, if an asset doubles (or triples) in price in a short period of time, it is generally unsettling from a traditional lens as it may imply the asset is in a bubble and is overvalued. Yet, given bitcoin’s structure, these kinds of moves are not atypical, as history demonstrates. This creates a challenge for larger market participants seeking to position size at what are believed to be reasonable entry prices.
Fourth, if we think of market beta as the ordinary market return a hypothetical market participant can expect to achieve through ordinary means, we can probabilistically assume that such an ordinary market participant is not likely to be concentrated in a single idiosyncratic risk position, but rather diversified across several assets.
Lastly, if digital assets are in fact considered to be an emerging asset class, there must be more than one asset to invest in.
In consideration of the above, it stands to reason that bitcoin may not in fact be an appropriate market beta for digital assets, but that diversified index products are.
It is also entirely possible market beta does not yet exist. It could very well be the digital asset market is still so early in its development that it is simply best to be treated as an absolute return asset class for the foreseeable future until the market becomes more developed and a stronger beta proxy is identified.
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Disclaimers:
The Vision Hill Active Crypto Indices are non-investable reference indices designed to be representative of the overall composition of the crypto hedge fund universe. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index. Performance information for the indices is provided for informational purposes only. It is our intent for the Vision Hill Active Crypto Indices to become the market standard benchmark for all actively managed crypto and blockchain-focused hedge funds, institutional allocators, and sophisticated investors for the purpose of providing proper composite and sub-strategy relative benchmarking. The reference indices presented here are for illustrative and discussion purposes only, are exclusively the property of Vision Hill Asset Management, LLC and Vision Hill Group, LLC, and are not for distribution.
Vision Hill Group is a full-service digital asset management and solutions firm that aims to lead investors into the future of digital assets. Vision Hill Group brings together a team with extensive experience in traditional financial markets, a deep passion and understanding of crypto and digital asset markets, and a history of risk and portfolio management. Vision Hill Group has three primary divisions: Vision Hill Asset Management, Vision Hill Research, and Vision Hill Advisors. Vision Hill Asset Management is the multi-strategy digital asset investment management division of Vision Hill Group. Our platform offerings enable us to invest across multiple strategies, investment theses, and time horizons to provide broad-based and diversified exposure to the evolving digital asset class. Vision Hill Research curates and distributes in-depth research and analytical insights for institutional clients and accredited investors that seek trustworthy, unbiased market intelligence and guidance in the nascent digital asset industry. The Advisory division of Vision Hill Group provides investment portfolio management and advisory services to institutional clients and accredited investors seeking bespoke solutions and consultation to assist them in achieving their investment objectives.
The content provided herein should not be considered investment advice, and is not a recommendation of, or an offer to sell or solicitation of an offer to buy, any particular security, strategy, or investment product.
