– By Matt Bauer, Strategist at Ned Davis Research
The recent launch of Bitcoin exchange-traded funds (ETFs) in the United States marked a significant milestone for digital assets. These funds have made Bitcoin more accessible to a broader range of retail and institutional investors. However, this newfound accessibility may come at a cost.
While many are optimistic that the introduction of Bitcoin ETFs will attract a fresh wave of investors and drive up prices, Matt Bauer raises a cautionary note. In a recent note, he acknowledges that the direct ownership and low fees associated with these funds are likely to foster the adoption of Bitcoin ETFs. Nevertheless, it remains uncertain if this enhanced accessibility will ultimately lead to increased demand for Bitcoin itself. What is concerning, Bauer explains, is that the growing accessibility to the world’s largest cryptocurrency is eroding the very qualities that set it apart from other assets.
For one, increased accessibility has resulted in a decline in Bitcoin’s volatility. Over the past decade, Bitcoin’s volatility has steadily decreased. Since the introduction of Bitcoin futures, which track the price of the spot token, volatility, as measured by the 100-day average of daily price swings, has not exceeded 4.5%. Following the launch of the ProShares Bitcoin Strategy ETF in 2021, this metric has remained below 3.5%. In the past year, volatility has been consistently below 2.6%.
“While adoption and product offerings continue to expand, it appears that volatility may continue to be suppressed,” Bauer states. “This poses a challenge for Bitcoin bulls, as the cryptocurrency has historically performed better during periods of rising volatility.”
As Bitcoin becomes more mainstream and widely accessible through ETFs, it faces the risk of losing its unique appeal. The very factors that once made it an attractive investment option – its volatility and independence from traditional markets – seem to be diminishing. While increased accessibility has its advantages, it is crucial for investors to consider the potential ramifications and adapt their strategies accordingly.
As the landscape of Bitcoin continues to evolve, only time will tell how these dynamics shape the future of this groundbreaking digital asset.
Bitcoin and the Changing Landscape
Bitcoin has undoubtedly captured the attention of investors worldwide. But how does it compare to the stock market? While Bitcoin’s volatility cannot be overlooked, it is essential to explore its behavior in relation to the S&P 500—the benchmark for Wall Street.
Volatility Comparison
When considering Bitcoin’s volatility, it is crucial to note that it remains significantly volatile compared to the broader stock market. The CBOE Volatility Index (VIX), also referred to as Wall Street’s “fear gauge” for the S&P 500, currently stands at 13. In contrast, Bitcoin’s volatility measure of 2.6% approximates a VIX reading of 33. However, it’s worth mentioning that Bitcoin’s volatility may evolve over time.
The Sharpe Ratio and Risk-Adjusted Returns
To evaluate risk-adjusted returns, we turn to the Sharpe ratio—a fundamental metric coined by Nobel Prize winner William Sharpe. Higher Sharpe ratios indicate more favorable risk-adjusted returns: ratios below 1 aren’t ideal, those between 1 and 2 are good, and ratios from 2 to 3 are very good.
In its early days, Bitcoin exhibited extended periods with a trailing Sharpe ratio above 2. However, over the past five years, Bitcoin’s ratio has roughly aligned with that of the S&P 500. According to Bauer, Bitcoin’s Sharpe ratio even lagged behind the benchmark stock index for the entirety of last year.
Bitcoin’s Convergence with the S&P 500
It is worth noting that Bitcoin is gradually resembling the S&P 500. This raises questions about why investors should choose to embrace the digital asset when they can achieve similar results through the more traditional stock index.
“Prior to the pandemic, Bitcoin exhibited a mildly negative correlation to the S&P 500, often functioning as a ‘safe haven’ asset during periods of risk-off,” explains Bauer. “However, since the pandemic, that correlation has trended higher as barriers to access lowered and adoption increased.”
The Takeaway
Bauer’s analysis leads to a straightforward conclusion: Bitcoin is increasingly behaving like the S&P 500, albeit with approximately twice the volatility and falling behind in terms of risk-adjusted returns. These factors contribute to the Bitcoin bear case, emphasizing the need for careful consideration in the evolving landscape of cryptocurrency investments.