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Source: Bloomberg, CoinShares, data as of July 10, 2020.

For years, however, there has been much debate among long-term investors with existing portfolios about who should get the best-performing assets of the decade. Is Bitcoin a commodity, a currency, a tech stock, some combination of the three, or an entirely new asset class in its own right?

What are asset classes?

There is no generally accepted definition of an asset class. In 2005, the Yale Endowment stated:"Since investment management is as much an art as it is a science, qualitative considerations play an extremely important role in portfolio decisions. Asset class definitions are fairly subjective, requiring precise distinctions where none exist". So, while we can help define digital assets through backtesting, there are also qualitative considerations.

However, a widely accepted definition of an asset class is that it is expected to exhibit different risk and return investment characteristics and behave differently in certain market environments. They are then usually split into real assets (like real estate) and financial assets (like bonds), and we don't think cryptoassets fit into those categories, it's a superclass of its own.

what is bitcoin

Which category Bitcoin falls into varies from country to country.

currency"currency", but we consider this unhelpful as it does not belong to the common definition.

To better understand Bitcoin's positioning, we need to understand its characteristics as a potentially investable asset."Bitcoin: A Peer-to-Peer Electronic Cash System"The author of Satoshi Nakamoto emphasized that the goal of the Bitcoin network is to establish an electronic payment system through cryptographic proof rather than trust. It is actually about creating a parallel currency system built on global open source software and networks, rather than relying on people or reputation.

Many have attempted to frame Bitcoin into the established framework of the current asset class, but it simply does not fit into any established paradigm due to its uniquely similar but often non-shared various attributes.

Furthermore, investors’ perception of Bitcoin greatly affects its past performance, which in turn affects its performance in different macroeconomic environments, which in turn leads to its positioning problem.

Perceptions of Bitcoin are changing over time, its image as a money laundering tool has faded and investors are now more interested in it. This is highlighted in the graphic below, where news reports of possible money laundering were more common in 2013-2014, but have since become less heard, while reports of Bitcoin as an investment have become more concentrated.

As long as speculative demand remains the main driver of price action, it is important to understand which fundamentals Bitcoin is performing"real"Driving force may be impossible. This leads to a situation where Bitcoin may have been one thing in the past, another thing now, and another thing in the future.

Nevertheless, if we are going to study Bitcoin in terms of its investability, we think it is necessary to categorize it according to how it might behave in a mature state where investors are more interested in its performance in the economic cycle. Identity performance is relatively certain. To do this, we must base our analysis on Bitcoin's fundamental characteristics on an economic level, de-emphasizing past and current price performance.

In Its Growth Stage, Bitcoin Is Behaving Much Like a Tech Stock

Bitcoin’s original price was $0, so it’s no surprise that Bitcoin investments have performed like successful startups, star-studded. As a potentially disruptive technology, Bitcoin's risk profile is quite similar to that of tech stocks: if its potential is realized, the value of both the system and its native asset may be huge, but at the same time, it fails completely (It may bring the value of Bitcoin close to zero) The possibility is still slim.

These characteristics influence which types of investors are willing to speculate on Bitcoin. This in turn affects how the general investor base treats it. If Bitcoin is perceived as a more liquid tech startup stock, this will likely lead its investors to view it as a potentially high-return, yet liquid, risky asset - opportunistically Buy and sell. Over the past two years, the market seems to increasingly view it as such a stock, as evidenced by its 0.52 correlation with the social media stock index, which includes"Companies active in the social media industry, including companies that provide social networking, file sharing, and other online media applications"。

At its maturity stage, we believe Bitcoin will behave more like a store of value

As the currency system of Bitcoin matures, its robustness has been further verified, and its risk of failure is getting farther and farther away from zero. We believe this will cause investors to start treating the asset differently, causing its macroeconomic behavior to follow suit.

While Bitcoin has grown in audience and size, its evolution has also made it increasingly apparent that it not only has potential utility as a store of value, but is increasingly financial as an asset. We argue that this financialization is self-reinforcing. As it becomes more financialized, the more likely it is to start acting as a store of value. Evidence of this is seen in the $4.9 billion in assets currently held in Bitcoin ETPs, funds, and trusts, and its increasing acceptance as collateral for fiat debt financing.

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Source: CoinMetrics

Bitcoin represents a new asset class

We also recognize that Bitcoin is capable of other functions, such as being safe and secure in ownership, providing an immutable and traceable record, and being a programmable currency that reduces administrative effort. These features are important to support our belief that Bitcoin should be defined as a distinct asset class.

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Source: CoinShares

digital gold

digital gold

digital gold"digital gold". While we don't think this theory is fully proven, it can be compared to gold's volatility.

Buying gold as an investment really took off after the 1970s. The 1934 "Gold Reserve Act" made it illegal to hold gold. It was not until 1975 that the United States legalized the possession and trading of physical gold again, and the currency was allowed to float freely away from the Bretton Woods system.

From the mid-1970s to the early 1980s, gold gradually became financialized. As this happened, its annualized volatility fell from its peak of 50%. Because of the high inflation of the late 1970s, it wasn't a straight drop, however, it's still on a downward trend. This is also a common trend for companies with low market capitalization to develop into companies with high market capitalization. Recently, Bitcoin has experienced several months-long swings against major developed market stock indexes.

Where Should Bitcoin Be in the Economic Cycle?

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Source: CoinShares

In this way, Bitcoin is similar to banks in that they tend to sit in the middle of economic cycles but are (to an extent) vulnerable to shocks from economic growth. Taking it a step further, though, it is likely, at least for now, to be related to technological growth rather than broader economic growth. What remains challenging is that technology is increasingly being leveraged by organizations to save costs during times of economic weakness. This further strengthens our thesis that Bitcoin in its infancy may have been relatively immune to the broader economic cycle. However, we can only be certain about this once Bitcoin has gone through one or more full economic cycles. Recent data on inflation suggest, as we expected, a small but growing link between Bitcoin and inflation, and we believe these observations warrant further study.

If the financialization of Bitcoin continues, it cannot be completely immune to the social and financial system. It therefore seems prudent to expect increased correlations with other asset classes in times of crisis, and we did observe this exact outcome during the COVID-19 scare in March 2020.

sui generis

We do not believe Bitcoin can be classified into any of the currently established asset classes. In the past, its characteristics made it look a lot like a tech growth stock, but we believe that's changing.

Due to its characteristics (scarcity, liquidity, high stability), there is evidence that investors are increasingly using it as a store of value. This has started a self-reinforcing process of financialization which we believe will lead to more and more people adopting it as a store of value. It needs to be emphasized that this is unlikely to affect Bitcoin's other compelling features such as digital ownership, security, providing an immutable and traceable record, and programmable money.

The mere possibility of its transition to a store of value brings its future potential market cap closer to that of traditional safe-haven assets like gold or U.S. Treasuries.