A new report argues that bitcoin should be considered the first in a new kind of asset class.

The paper was produced by digital currency exchange and wallet startup Coinbase and ARK Invest, an investment management firm that specializes in disruptive technologies and offers financial products tied to bitcoin.

The white paper, written using data from Coinbase, TradeBlock, the S&P 500 Index and several additional industry benchmarks, outlines four approaches to characterizing assets before laying out the argument that traditional investors should view “cryptocurrency” as an entirely new asset class.

ARK Invest analyst Chris Burniske, who co-authored the report, said that the project started as an exploration between the two companies of how people use gold to buy bitcoin.

Burniske told CoinDesk:

“We realized this is a bigger story than comparing bitcoin and gold. This is about bitcoin and cryptocurrencies maturing into their own asset class.”

The new report builds on a 1997 paper about asset class characterization, which breaks down assets into three categories: capital assets, consumable/ transformable assets, and store-of-value assets.

Burniske and co-author Adam White, who serves as vice president for Coinbase, go on to define four distinct characteristics of traditional asset classes, positioning bitcoin both within and beyond those traditional definitions.

Liquidity and distinctness

The first characteristic of an asset class that the report outlines relates to what it calls “investability”. This, according to the report, pertains to whether an asset class provides sufficient liquidity and opportunity to invest.

In the case of bitcoin, ARK Invest and Coinbase analyzed bitcoin exchange trading volumes from July 2011 through the first quarter of 2016 to determine the liquidity available to investors.

Using data obtained from Bitcoinity and Tradeblock’s XBX Index, the paper shows steadily increasing volume, reaching as much as $1b per day through April of this year – though it acknowledges that this high figure is driven by self-reported figures not subject to third-party validation.

Next, the report defines a traditional currency relative to its “politico-economic features”. To be an asset, the report argues, the entity needs to have a unique profile that “arises” from its value, governance and use cases.

In each case, the report draws distinctions between bitcoin and traditional asset classes.

For example, bitcoin’s operational model, in which transactions are broadcast and verified on an open network, results in a predictable, “mathematically metered” release of the asset. By 2140, 21m bitcoins in the market will exist – by comparison, roughly 15.6m bitcoins have been created to date.

According to figures provided in the paper, that’s distinct from both the US monetary base and gold supply, which increase at sporadic rates based on data from the Federal Reserve Bank of St. Louis and Number Sleuth’s “All the World’s Gold Facts”.

The report argues:

“Compared to bitcoin, no asset has evolved from concept to billions of dollars in stored value so quickly. Moreover, no asset in history has followed such a predictable supply trajectory.”

Sufficiently different

The third trait used in the report to define traditional assets and help position cryptocurrencies as a new asset class relates to “price independence”, a characteristic that suggest how assets should exhibit a low correlation on returns relative to other assets in the marketplace.

Put more simply, an asset needs to be sufficiently independent from the value of other existing assets.

Using data sourced from Bloomberg and TradeBlock, ARK Invest and Coinbase compare bitcoin with the S&P 500, along with data on US bonds, gold, real estate, oil, and emerging market currencies.

“Strikingly, bitcoin’s price movements have been separate and distinct from those of other asset classes during the last five years,” the report states. “It is the only asset that maintains consistently low correlations with every other asset.”

Lastly, ARK Invest and Coinbase argue that the first three characteristics of traditional asset classes need to differentiate the risk-reward profile of the entity, leading to easily defined returns and a degree of volatility.

Using the Sharpe Ratio, which measures the returns on an investment per unit of risk, the authors of the report analyzed a five-year span from May 2011 through May 2016.

With data sourced from the XBX Index, the report shows that, during the five-year period, the average daily volatility compared to the previous year decreased from about 10% to about 4%.

Bitcoin’s daily volatility in May 2016 was roughly a third of that figure compared to five years ago, and 24% less than at the start of May 2015, according to the paper.

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