Author: Christian Hsieh, CEO of Tokenomy
Many investors are facing the decision of whether to allocate some exposures to bitcoin or other cryptocurrencies. The purpose of this article is to clarify those differences and highlight the reasons why bitcoin has become an emerging asset class that can no longer be ignored.
Bitcoin is invented as a peer-to-peer electronic cash system without the need of going through a third party financial institution1. Since 2009, the Bitcoin network started the longest running blockchain that ensures high security and prevents double-spending. Since then, there are many other cryptocurrencies came out to address different solutions, such as offering faster transaction speed or shorter block processing time. Examples like Litecoin, Ethereum, Ripple are just a few representations of an ocean of similar cryptocurrencies that emerged out to claim their domains in the cyberspace. Below we are listing the top 8 cryptocurrencies and their features for comparison purposes.
|Bitcoin (BTC)||Bitcoin Cash (BCH)||Ether (ETH)||Litecoin (LTC)||Ripple (XRP)||EOS (EOS)||Stellar (XLM)|
|Circulating supply||>17 million||>17 million||>102 million||>58 million||>40 billion||>906 million||>18 billion||65 million|
|Maximum supply||21 million||21 million||No upper limit||84 million||100 billion (pre-mined)||No upper limit||No upper limit||100 million|
|Current mining / release rate||12.5 per block||12.5 per block||3 per block||25 per block||1 billion per month||Up to 5% inflation per year||Up to 1% inflation per year||Up to 15 million per year|
|Transactions per second (max)||7||60||20||56||1,500||2,800||1,000||1,000|
|Block time (approximate)||10 minutes||10 minutes||15 seconds||2.5 minutes||Near instant||0.5 seconds||5 seconds||15 seconds|
All cryptocurrencies – including Bitcoin, Ethereum, and others – share a few key characteristics:
- A transparent, auditable, and predictable supply schedule
- Censorship resistant – no one can prevent any holder from spending his crypto.
- Permission-less – a user does not need to ask for permission to begin using these systems. He just downloads software, generates private keys, and can start, no questions asked.
- Self-sovereign – a user owns bearer assets. He doesn’t need to rely on a trusted party, and therefore he can walk across borders carrying $1B in his head.
- Divisible — can be divided into small increments that can be used in exchange for goods of varying values
- Portable — meaning that it can be carried
- Fungible — meaning all units are essentially interchangeable3
However, the differences of these cryptocurrencies are mostly technical. It requires more observation time to determine what role each cryptocurrency is playing to justify the purpose of their existence. Currently Ethereum is experimenting the smart contract domain, Ripple is attempting to facilitate faster cross-border remittance settlement, and Litecoin or Bitcoin Cash is trying to improve the transaction speed to allow day-to-day payments using cryptocurrencies. These utilities are all essential to build a complete new ecosystem powered by blockchain, but it may take decades for multiple testing to eventually reach wide adoption. From an investment point of view, only bitcoin seems to justify the claim of a digital gold, or a decentralized store of value. After all, it possesses the largest networking effect, longest blockchain, most secured and decentralized network, and accepted by most merchants.
Return Profiles of Bitcoin
In the past 10 years, bitcoin has risen from almost nothing to over $9,700 today4 (at the time of publication). Although the volatility is extreme, it is slowly gaining adoption and attracting investors from a long term perspective.
Who is buying bitcoin? In the Bitwise Investments January 2020 Investor Letter, it pointed out that Charles Schwab recently published a report on the largest equity holdings of clients in the retirement accounts, segmented by generations. It turns out that bitcoin, as expressed through the Grayscale Bitcoin Trust (GBTC) – is the fifth-largest holding in millennial retirement accounts.5
Bitcoin Is The Fifth-Most-Popular Equity Holding Among Millennials At Charles Schwab6
Millennials are defined as individuals who are 22-38 years old. In the next decade, they will age into the 32-48 range, putting the majority into their prime income-earning years (roughly age 35-60). By 2030, there will be more prime income-earning-age millennials than baby boomers or Gen Xers.
In a recent Coindesk Research report, it shows that Millennials have emerged as adopters and drivers of cryptocurrencies7, with one poll showing today’s 18-to-34-year-olds preferring bitcoin over more traditional investments.8 This survey results show a surprising awareness of, and openness to a higher-risk investment such as bitcoin.
Percentage of 18- to 34-year-olds who say they prefer bitcoin to…
Portfolio Exposure with Crypto
As an emerging asset class itself, bitcoin is still making its case to become mainstream. Although the return profile has been very strong, the volatility and uncertainty is still worrisome for most traditional investors. What about just allocate a little exposure to this asset class? What does the return profile look like when you add some cryptocurrencies into your traditional portfolio?
In a research paper published by Bitwise Investments in May 2018, it found that by adding a small allocation to crypto assets in a traditional, diversified portfolio (60% equity / 40% bonds), the return profile can experience a significant change.
To evaluate the role of bitcoin in a portfolio, the study looked at the impact of making a 5% allocation to bitcoin and holding that position for the duration. The bitcoin allocation was drawn on a pro-rata basis from the equity and bond positions, meaning the portfolio (which we will call the “HODL Portfolio”) started with a 57% allocation to stocks and a 38% allocation to bonds.9
The impact of this small bitcoin allocation was dramatic. Bitcoin’s strong performance during the study’s timeframe powered the portfolio higher, with total returns jumping from 26.53% to 67.70%. Of course, the volatility and maximum drawdown also increased at the same time, but as an illustration, a small percentage of bitcoin allocation can really impact the entire portfolio performance.
Bitcoin has emerged as a new asset class that can now be considered as an investment tool, although its use can also be justified as a digital store of value, a native internet of money, and a median of exchange. While other cryptocurrencies are still testing various use cases in the blockchain domain, it is overall beneficial to have some crypto exposures.
The return profile of bitcoin has proven to be strong in the past decade, and the millennials are accumulating the crypto assets in their long-term retirement accounts. In the next 10 years, this group will be the prime income-earning population.
Morgan Stanley recently posted a report suggesting that a weak environment for economic growth and inflation, paired with low bond yields, the returns from a traditional portfolio made up of 60% stocks and 40% bonds will deliver a 2.8% annual return over the next 10 years, the lowest level in nearly a century.10 Perhaps it is time to for investors to reconstruct the portfolio composition and add some bitcoin and other cryptocurrencies to boost up the overall returns.
- Bitcoin White Paper https://bitcoin.org/bitcoin.pdf
- Cryptocurrency comparison on com
- $100 Trillion by Kyle Samani
- Bitcoin Charts https://coinmarketcap.com/currencies/bitcoin/
- Bitwise Investor Letter January 2020
- Charles Schwab report: Schwab Report: Self-Directed 401(k) Balances Hold Steady
- Coindesk Research: Crypto in Context
- Blockchain Capital and Harris Poll, “Blockchain Capital Survey Finds Over One-in-Four Millennials Would Prefer Investing in Bitcoin Over Stocks and Bonds,” News release, November 8, 2017.
- Bitwise: The Case for Crypto in an Institutional Portfolio [link]
- Bloomberg Markets: Morgan Stanley Sees Market Returns Tumbling over the Next 10 Years
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