Disruptive technologies have the potentiality to transform existing traditional set ups in a more efficient way. Bitcoin and other digital currencies are primarily for acting as a medium of exchange without the limitations of fiat currencies. But due to their numerous applications and quick adoption, they have become a viable option of investment. Bitcoin has been very successful so far in 2016 with the currency experiencing great adoption and returns. On a parallel scale it has been one of the best performing entities of the year. Let’s look into whether we can actually treat Bitcoin as an asset class and invest profitably:
For any asset class, ample liquidity is an important factor to make profitable investments. Without good liquidity it would be difficult to understand and study market dynamics. After seven years of very organic development Bitcoin ecosystem has consistently gained good volumes. Currently the volumes have started surpassing $1 billion in a day on an average. At this rate, it is almost as liquid as Gold is and far more liquid than heavily invested assets. It is also very secure owing to the infrastructure built around the peer to peer network of the currency. Hence Bitcoin offers good liquidity to investors for heavy investments.
Qualities of the asset:
Qualities of the asset refer to how the asset holds value and how it might change with time. This in totality refers to all the qualities that are related to the asset that might govern its value. In this respect, Bitcoin follows Gold and other precious metals. The major correlation is the fact that the supply is limited. With Bitcoin, we have a definite time frame in mind and it doesn’t have the uncertainty factor like in the case of Gold. This makes it even more valuable and the prices are sure to tend higher. Apart from this, adoption and ease of transfer make it a better store of value than Gold. Hence given the above mentioned factors this makes it a very viable asset class to invest.
Correlation with other asset classes:
To transform into a mainstream asset class that is suitable for investments, Bitcoin’s correlation has to be low w.r.t other asset classes. This would then enable it to be a worthy portfolio diversification component. It is this quality that keeps a diversified portfolio safe from losses.
Bitcoin has little or no correlation with any of the existing asset classes. The maximum correlation, that bitcoin exhibited with each of the other assets is the minimum correlation that any of the other paired assets displayed with each other. This means it would be one of the safest asset classes to invest in as the fundamentals governing this market are totally different.