Coinbase, cryptocurrency exchange and wallet provider, and ARK Invest, an investment management firm, have released a new research white paper that explores the merit of bitcoin as the first of its kind in a new asset class—“cryptocurrency”— distinct from all other asset classes.



Penned by Chris Burniske, Blockchain Analyst and Products Lead at Ark Invest and Adam White, Vice President of Business Development & Strategy at Coinbase, the report, titled “Bitcoin: Ringing The Bell For A New Asset Class”, the report says that bitcoin exhibits characteristics of a unique asset class:

meeting the bar of investability - providing ample liquidity and opportunity to invest



differing substantially from other assets in terms of its politico-economic profile



price independence



risk-reward profile – a comparison of risk in the form of volatility, and reward in the form of absolute returns

Speaking of investability, the paper highlights that bitcoin exchange trading volumes have been increasing steadily, reaching approximately $1 billion per day through the first quarter of 2016. Although bitcoin is not the most liquid or widely held asset globally yet, Coinbase and ARK Invest believe that its thin market and fringe status is overstated.



“With each month, bitcoin cements its role as a tradeable and investable asset, drawing second looks from many investors who wrote it off as fraud or fad”, it added.



The paper stated that the politico-economic profile of an asset class is driven primarily by its basis of value, governance, and use cases. It expects the number of people using bitcoin to transact to grow as its more innovative use cases evolve.



“These use cases harness the power of Bitcoin’s blockchain more abstractly, facilitating the transfer of real estate, bonds, and autos, decentralized venture funding, or votes in an election via smart contracts”, the paper noted. “These applications clearly separate bitcoin from all other asset classes.”



Focusing on price independence, the paper said that assets with near zero correlation are the most untethered in their behavior to other assets. To that end, it finds that bitcoin’s average one year correlations with other asset classes are centered around zero, on the basis of the last five years of data.



“[T]he average correlation of bitcoin to all the other asset classes is -0.02. Bitcoin’s price independence — at least in the limited trading history of the asset—is stark”, it said.



Bringing attention on risk-reward characteristics, the report makes observation on two fronts – volatility and absolute returns. It noted that while bitcoin’s volatility has dropped significantly, it is still the most volatile of the broad asset classes over all the periods considered in the analysis.



“However, that may not remain the case for long since over the last year bitcoin was slightly more volatile than oil”, it said.

Regarding absolute returns, the paper said that given the short life that bitcoin has had so far, it has provided investors with stellar absolute returns, above and beyond that of any other asset class.



“As Bitcoin’s open-source software evolves, bitcoin will differentiate itself further from other asset classes. Recent innovations like segregated witness46 promise to catalyze bitcoin’s more innovative use cases. Smart contracts and sidechains, for example, could enable entirely new financial services like liquid private markets and truly peer-to-peer loan issuance”, it said. “ARK and Coinbase believe bitcoin is the first of its kind in what is rapidly becoming a distinct asset class”.