THE CHANGING ANATOMY OF BITCOIN: FROM AN INVESTMENTS AND MONEY PERSPECTIVE

Abstract

Bitcoin is a digital currency that has been surrounded by hype and controversy, experiencing a massive price run-up which was followed by a crash. Since then, the bitcoin ecosystem has matured and prices have stabilized. This paper builds on past research into bitcoin from an investments perspective, analyzing how bitcoin’s behavior has changed over time. A test for structural breaks was conducted to identify unexpected shifts in the bitcoin price time series, uncovering a post-bubble period where bitcoin was found to exhibit drastically lower returns and volatility. Skewness and kurtosis have also moved to be more in line with conventional asset classes. Although bitcoin continues to have low and insignificant correlation with traditional and alternative assets, mean-variance spanning tests suggest that bitcoin no longer significantly extends the investment set. Analyzing the results of 1/N, strategically weighted, risk-parity, and minimum variance portfolio allocation approaches also indicate that the addition of bitcoin no longer offers a large improvement in the risk-return tradeoffs of a diversified portfolio, compared to the past. With those findings, this paper revisits the implicit assumption that bitcoin behaves like an asset and conducts further analysis into the new behavior of bitcoin vis-à-vis developed and emerging currencies. While returns and volatility are still high, even by emerging currencies’ standards, skewness and kurtosis were found to be in line with the behavior of conventional currencies. Overall, bitcoin was found to exhibit a low and insignificant correlation with currencies as well. Despite the low and insignificant correlation, mean-variance spanning tests found that bitcoin is spanned by the existing money universe. Given the findings from the investments and money perspectives, we conclude that bitcoin is exhibiting more money-like characteristics amid a maturing ecosystem, and has a reasonable future.