Is Bitcoin A New Asset Class?

The astonishing bull market (bubble?) in Bitcoin has drawn attention to the cryptocurrency from all corners. One of the questions that’s reasonating: Should Bitcoin be treated as an asset class, on par with stocks, bonds, real estate and commodities?

A Forbes article last year, citing a study by ARK Investment Management, offered “4 Reasons Why Bitcoin Represents A New Asset Class.” The firm, which Forbes labeled as the first public fund manager to invest in Bitcoin, argues that the low correlation is a key variable for the decision.

“If an investor who holds bonds and equities swapped a percentage of their prior holdings into bitcoin, because of bitcoin’s low correlation and superior absolute performance, they could have decreased the volatility of the portfolio while simultaneously increasing absolute returns,” opined Chris Burniske, an analyst at ARK and co-author of “Bitcoin: Ringing the Bell for a New Asset Class.” The low correlation, he asserts, “is the golden bullet of an asset class.”

Perhaps, but skeptics might wonder how much of Bitcoin’s allure as an alternative asset class is bound up its extraordinary rise of late. It’s doubled in just over the last three months. Longer term, the gain is even more impressive — off the charts, in fact. Valued at just a few pennies in mid-2010, it was trading yesterday around $2,800, according to Coindesk.com.

Whatever you think of Bitcoin (and its various competitors, such as Ethereum), there’s at least one fact that everyone can agree on: price changes for Bitcoin and its rivals are extraordinarily volatile. That’s good news if you’ve been long the currency of late, but upside volatility has a dark side. Bitcoin drawdowns in the past have been extreme to the point of making changes in the stock market look like a money market fund by comparison. Bitcoin, it’s fair to say, is not a marketplace for the feint of heart.