Forbes: Coinbase payment service website will add Ethereum this month

At the beginning of this year, Bitcoin celebrated its seventh birthday and it seems that it is getting closer to maturity.

At the end of 2013, the price of Bitcoin once exceeded the peak of $1,000, and fell back to $200 last year. Now, it is hovering around $650, but its price volatility has gradually become smaller. Institutional investors have shown greater demand, and cryptocurrency exchanges have also provided more advanced features for professional traders. Even giant companies such as Dell, Expedia, and Overstock have begun to accept Bitcoin as a payment method.

But what do these developments mean?

On this week’s show, I discuss these trends in depth with my two guests, Chris Burniske (blockchain analyst and product manager at ARK Investment Management) and Adam White (VP of Business Development and Strategy at Coinbase).

The two collaborated on a white paper outlining four major reasons why Bitcoin represents a new asset class.

White, whose company has brokered nearly $4.5 billion worth of bitcoin transactions for clients, has a number of large retailers accepting bitcoin payments through Coinbase, and has also launched an exchange, now renamed the Global Digital Asset Exchange (GDAX).

(Author on the left; Chris Burniske on the right; iPad screen by Adam White)

For their research, they cited Robert Greer’s paper “What Are Asset Classes?” and determined whether Bitcoin met four of the criteria.

The most striking finding comes from calculating the one-year volatility of Bitcoin and its correlation with other asset classes. It proves that the correlation between Bitcoin and other asset classes is almost zero, that is, the volatility of other asset classes does not affect Bitcoin.

“You can have a volatile asset, but if it has zero correlation to the rest of your portfolio, it can actually reduce the overall risk of your portfolio,” Burniske said. “We’ve seen this with bitcoin in the past. For example, if you traded 1% of your equity (which was already in your portfolio), by the end of 2014, you would have reduced the overall risk of your portfolio and increased your absolute portfolio return, which is the dream of an investor.”

White concluded that “diversifying one’s portfolio and adding alternative asset classes such as Bitcoin may be a prudent step for many asset managers or individuals.”

White added that while Bitcoin is more volatile than other asset classes, its volatility has gradually declined over the past few years.

In addition, they also studied the daily Bitcoin transactions in the market, which reached $1 billion, and the over-the-counter transactions were also increasing.

“We really think it becomes a global asset that a lot of people can trade.”

It is these characteristics that attract institutional investors.

“We’re seeing volumes going up, which is providing liquidity, which is making volatility go down, which is also attracting more institutions,” Burniske said. In fact, over the last year, bitcoin’s volatility has approached that of oil.

Bitcoin's appeal is particularly evident during times of financial crisis. For example, White said that on the day of Brexit, Coinbase's daily registered users doubled, and the number of bitcoins purchased by existing users increased by nearly 3.5 times. "While it's too early to say whether Bitcoin is a safe haven investment, we've seen some signs," White said.

Burniske also added that when the yuan continues to depreciate, the price of Bitcoin will also tend to rise.

When asked about the hundreds of altcoins that have lost value to near zero, White cited two first-mover advantages and pointed out that many other altcoins are merely imitating Bitcoin.

Burniske mentioned the network effect, “This is what we focus on at ARK. If I have a phone, it’s very useful, and if Adam and I both have phones, it’s even more useful… and altcoins, although they will be a little hot after they are born, they don’t have a flywheel effect, so they can easily fade out of people’s sight. Ethereum has done a lot of great work and it has overcome this difficulty.”

Speaking of Ethereum, we also discussed the Distributed Autonomous Organization (The DAO), the most successful crowdfunding project in human history, which raised more than $150 million worth of Ether, but was soon hacked and more than $50 million worth of Ether was transferred to a child DAO.

Burniske stressed that what happened with The DAO doesn’t necessarily reflect on Ethereum as a whole: “While the DAO was breached, that doesn’t necessarily reflect a security issue with the Ethereum blockchain.”

White pointed out that Ethereum is only a year old and needs more experimentation, but Coinbase has added ether to the GDAX exchange and will add ether to Coinbase.com , Coinbase’s payment service, later this month.

As for whether Ethereum is a cryptocurrency worth investing in, Burniske said, "I think of Ethereum as more like digital oil and Bitcoin as digital gold."