Is Bitcoin a good candidate to be considered a reliable proxy for the cryptocurrency market beta? Empirical analysis shows that the world’s most famous cryptocurrency has a certain degree of systematic risk, but also that its correlation with the digital market is only moderate, not high.
Moreover, being bitcoin an asset whose scarcity is guaranteed by its own nature, it has a volatility trend that looks like an ascending parabolic curve, a trend which has been observed since its birth. This makes it very difficult to overcome it for both passive and active portfolio managers. And this is why the attempt to identify the alpha (in the beta context) is difficult. Active traders aim to outperform their benchmarks, which are often beta proxies. They should consider, however, that a temporary relative underperformance was observed in the second quarter of 2019.
Moreover, bitcoin is often considered an inflated or overvalued asset, due to its structure which often grants traders triple-digit returns in the short run, as empirical evidence shows. This creates a challenge for the largest market players trying to position trading size at what is believed to be reasonable entry prices.
Finally, it is perfectly possible that a market beta in the digital currency market does not exist yet. This market is in fact still so neophyte that it is better, for bitcoin, to be treated simply as a total return asset class in the near future, at least until the market has developed well and a more reliable proxy has been identified.