Bitcoin does not play according to the rules of the classic portfolio theory. But that’s exactly what makes it an exceptional asset – possibly the best the world has ever seen.
In the world of portfolio theory there is an overarching, irrevocable dogma: Those looking for higher returns must be prepared to take more risk. So there is typically a linear relationship between risk and return.
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This can be checked with government bonds. German government bonds, rated AAA, promise a return of -0.49 percent over ten years. Not a particularly lucrative investment, but pretty safe. Meanwhile, the current interest rate on Brazilian 10-year bonds is over 7 percent. The rating agency Fitch rated the paper BB-. Investors must take into account a potential bankruptcy of the Brazilian budget when investing.
Conversely, what percentage of the portfolio investors invest in which type of security depends solely on their risk tolerance. Risk-averse investors are likely to prefer a portfolio that relies more on safe bonds and more aggressive investors focus more on stocks, ETFs and alternative investments.
Safe is not always better
Anyone who follows the textbook opinion about the linear relationship between risk and return runs the risk of missing out on the really good opportunities. There are investments that don’t quite fit into the described pattern. Bitcoin is one of them. Not only is Bitcoin retrospectively the best performing asset in human history; Even in relation to the associated risk, BTC beats the competition by far. Depending on where you start measuring, BTC has grown by over three million percent in the first decade of its existence.
So do investors have to be extremely willing to take risks in order for a BTC investment to be considered? Limited. Because, contrary to what modern portfolio theory suggests, Bitcoin is less risky than assumed. Sure, digital gold is quite volatile – significantly more volatile than gold, oil and the S&P 500, for example. But not as volatile as the price should theoretically be with such a return. In other words, Bitcoin is what is known as an asymmetrical investment.
Bitcoin: exponential growth possible
With crypto currency No. 1, risk and return are not linear, but rather convex. The return does not increase proportionally to the risk, but increases exponentially.
This already intuitively conclusive description of the course events can be measured with the Sharpe ratio . This is a quantitative indicator that relates the risk, measured in terms of volatility, to the return. A Sharpe ratio> 1 means an above-average return on the asset in relation to the risk assumed. It turns out that when compared to assets like gold, stocks, and oil, Bitcoin is the big winner in terms of asymmetry. BTC currently has a Sharpe ratio of 2.83. The next best asymmetrical asset is gold with just 1.98.