According to renowned macro-analyst Reggie Middleton, the risk-adjusted return on bitcoin is far superior to any stock, commodity, currency or asset class — but most mainstream analysts will never recommend it.
Comparing Bitcoin to Other Asset Classes
Despite the widely-held mainstream view that bitcoin is an extremely risky investment, Reggie Middleton, CEO of blockchain-based trading platform Veritaseum and BoomBustBlog, recently published a surprising report detailing the risk-adjusted return on bitcoin over the last six years.
Using the metric “units of return received per unit of exposed downside risk” to calculate risk/reward, Middleton shows bitcoin has similar downside risks, but a significantly higher upside when compared to traditional asset classes.
Using the BTC vs the USD/EUR pair as an example, Middleton calculates that despite downside risk for the last 6 years averaging out to 28 percent, bitcoin’s upside return (in excess of this downside risk) was 1363.93%. The chart below illustrates that beginning in 2012 the excess rate was 2007.1%, but by the end of the year it dropped to 98.9% on the back of bitcoin falling into, and inching out of, its first major bear market.
At the end of 2013 however, the excess rate was up to a whopping 5942.5 per cent due to the post-Silk Road run-up. The mania didn’t last long, and by the new year in 2015, the excess return had plummeted to -67.8 per cent. The market hit lows during 2015 and, with a gradual recovery in price preceding a renewed bullish sentiment, January 2016 saw a return to 50.3 per cent and January 2017 a further increase to 128.2 per cent.
Bitcoin Less Risky Than We Thought?
To some observers this may only reinforce their perception that bitcoin is too volatile for any sound investor. But, when you calculate that your return per unit of risk is 49.31 and compare that to a traditional investment with exposure to the USD/EUR, the appeal becomes much clearer.
While the downside risk with the USD/EUR is smaller at 3.14 percent (largely due to the size and liquidity of the forex market), the excess return of the risk free rate is only a meager 2.07 per cent — leaving the units of return per unit of risk at a tiny 0.66.
Middleton: Institutions Have a Strategic Interest to Not Promote Bitcoin
This contradicts most mainstream financial analysts views regarding bitcoin, something Middleton believes is in part due to most institutions having a “strategic” incentive to not promote bitcoin. Subsequently, analysts are hamstrung as there is no incentive to recommend purchase to their clients.
Highlighting a recent Credit Suisse report stating that “The value of the cryptocurrency has been three times as volatile as the price of oil and 11 times more than the post-Brexit [GBP],” Middleton argues they are not making a valid comparison:
“What do you get from that?” Middleton asks, “[Credit Suisse] ignores the very unique financial benefits … volatility is not the enemy. The enemy is downside risk. When you strip out upside movements, bitcoin has only .15x more downside risk than WTI Crude. Remember, we need to look at both sides of the risk/reward equation [and] bitcoin has 203x more upside.”
Middleton has built a career out of this practice of sniffing out hidden opportunities and risks in spite of mainstream narratives. Previously, he sounded the alarm on Bear Sterns, Lehman Brothers and the wider Eurozone banking system, months before the calamitous collapses that wiped out investors around the globe.
So while past performance is no indication of future success, taking Middleton’s analysis into account could be well worth your while.
What do you think of Reggie Middleton’s risk analysis? Let us know in the comments.
Image via Pixabay.