Bitcoin and Beta Risk (Part One)

In stock markets, beta is a well-known measure of market volatility, or unsystematic risk a single stock has relative to the systematic risk of the entire market, whose beta coefficient is equal to 1.0.

The difficulty in defining a market beta in the digital currency business is that there is no unanimous consensus among experts to identify a reliable proxy such as the S&P 500 or the Dow Jones indexes in the stock markets. Cryptobusiness is taking its first steps in the financial industry, and bitcoin holds an undisputed dominant position in this market. This is why the most famous cryptocurrency in the world should be considered, at least from a theoretical standpoint, as the most natural proxy choice for market beta.

But what is market beta in the cryptocurrency business? As we said, bitcoin holds a dominant position in this market. Despite this, however, there are several disadvantages in considering it as a suitable proxy for the beta of the digital currency market. Firstly, bitcoin is an asset with completely idiosyncratic characteristics. This means that it produces non-systematic risks that can be mitigated through portfolio diversification.

Some experts argue that bitcoin is still the only safe haven asset in the cryptocurrency industry and that if it were to be sold it is very likely that all other cryptocurrencies would be sold consequently, as if confidence in the largest liquid asset in the industry would be lost. Recent empirical evidence, however, shows that, with the exception of 2018, the correlation between bitcoin and 90% of the public digital asset market was moderate, rather than high.

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