Report: Cryptocurrencies Show Signs of Maturing But Remain Too Risky

Bitcoin (BTC) presented historically low volatility this year, argues the Dec. 2019 SFOX report released on Jan. 8. Coupled with a lower correlation with altcoins, there are emerging signs that the market could start to behave in a more predictable way. However, the cryptocurrency asset class remains disproportionately risky compared to the stock market.

In its final monthly report for 2019, the analytics firm SFOX analyzed the yearly performance of Bitcoin and other cryptocurrencies.

Compared to traditional assets such as gold and stocks, Bitcoin held a remarkably low correlation index for the past six months. Its average 30-day correlation amounted to -0.037 for the S&P 500 and 0.149 for gold. In addition, the correlation between Bitcoin and altcoins dropped from highs of 0.7 to as low as 0.4.

Furthermore, Bitcoin’s volatility fell during the later stages of the year. While still remaining well above the corresponding values for traditional assets, cryptocurrency markets registered a relatively low level of volatility compared to 2018. BTC closed 2019 at 32.05 percent historical volatility, which was in the bottom 10 percent of its volatility range in the previous year.

Source: SFOX report

The combination of low volatility and low correlation “made BTC a compelling tool for portfolio management in 2019,” SFOX concluded. However, it also highlighted that the data set is not large enough to make meaningful predictions about the trend in 2020. Bitcoin options contracts, such as those recently launched by Bakkt, imply volatility of over 70 percent for the second half of this year.

Cryptoassets still disproportionately risky

BTC showed impressive year-over-year returns of 93.8 percent in 2019, compared to the S&P 500’s 29 percent and gold’s 52.8 percent. But while the lower volatility may point to a gradual increase in market maturity, the risk is still outsized compared to the rewards.

The Sharpe ratio, a risk-reward measure that compares an asset’s returns with its volatility, was significantly higher for the S&P 500. The ratio’s value for BTC amounted to 1.74 in 2019, while the leading stock market clocked in at 2.54. This means that traditional markets, despite their significantly lower returns, were statistically a more profitable investment than cryptocurrencies.

It is unknown whether these trends will persist in 2020. SFOX identified the upcoming Bitcoin halving and introduction of options contracts as potential positive drivers. Conversely, the recent Youtube content ban may be a sign of upcoming pressure from tech companies.