Crypto Cheerleader Mike Novogratz: Analyzing Bitcoin's Merit and Risk-Adjusted Return.
Introduction
In the ever-evolving world of cryptocurrency, one name stands out as a passionate advocate: Mike Novogratz, the founder of Galaxy Digital Holdings Ltd. Novogratz has been vocal about Bitcoin's potential and has encouraged investors to scrutinize the digital currency's numbers to comprehend its allure. However, despite his cheerleading, not everyone shares his enthusiasm.
The Call for a Spot Bitcoin ETF
Recently, BlackRock Inc, the world's largest money manager, requested approval from the Securities and Exchange Commission (SEC) for a spot Bitcoin exchange-traded fund (ETF). Unlike futures-based ETFs, a spot ETF directly invests in Bitcoin, making it easier, cheaper, and more secure for investors to buy, sell, and hold the cryptocurrency. While BlackRock's request hasn't seen immediate success, the weight of its demand might eventually sway the SEC.
The Importance of a Spot Bitcoin ETF
The advent of spot Bitcoin ETFs could transform investment portfolios by introducing a legitimate and regulated financial product into the crypto industry. In an environment plagued by scams, having regulatory oversight can boost investor confidence, especially if backed by a reputable institution like BlackRock.
Analyzing Bitcoin's Performance
To evaluate Novogratz's claim that Bitcoin has outperformed other investments in terms of the Sharpe Ratio over the past three years, we need to run the numbers ourselves.
Bitcoin's Growth and Volatility
One of the first things that catch the eye is Bitcoin's remarkable growth since its inception in July 2010. Those who invested early and held onto their coins have seen unprecedented returns, with an annualized return of 176 percent. However, when considering risk-adjusted returns, Bitcoin's Sharpe Ratio isn't significantly better than the S&P 500's ratio of 0.89. Despite its outpacing performance, Bitcoin has also been 13 times more volatile than the S&P 500.
Short-Term Performance
To get a clearer picture, we should analyze Bitcoin's performance over shorter rolling periods. Over the most recent three years, Bitcoin's Sharpe Ratio was 0.63, lower than both the S&P 500 (0.8) and the MSCI ACWI Investable Market Index. Even its median Sharpe Ratio of 0.94 for all three-year periods falls behind the S&P 500 and is similar to that of the Bloomberg US Aggregate Bond Index.
Variability in Results
Bitcoin's results are highly variable, leading to drastically different outcomes depending on when an investor enters the market. Its rolling three-year Sharpe Ratios are three times more volatile than those of stocks and nearly twice as volatile as bonds. Bitcoin has outperformed the S&P 500 in only about 40 percent of rolling three-year periods, though it has fared better against bonds and non-US stocks.
Unique Risks of Bitcoin
Unlike traditional diversified investments, Bitcoin carries additional risk due to its nature as a single cryptocurrency. While the Sharpe Ratio assesses market volatility, it doesn't account for the possibility of permanent loss. Individual stocks or bonds, including Bitcoin, can face complete wipeout, making it inherently riskier even at comparable Sharpe Ratios.
Conclusion
As spot Bitcoin ETFs approach approval, the debate over Bitcoin's merits relative to other investments will intensify. Analyzing the numbers provides a clearer perspective on Bitcoin's performance and risk-adjusted return. While Bitcoin's growth has been impressive, its volatility and potential for permanent loss are critical factors to consider. As investors embrace the future of cryptocurrency, a more balanced conversation will ensue, acknowledging both the opportunities and the inherent risks presented by Bitcoin and other digital assets.