No Investment Advantage to Bitcoin Competitors¶
Bitcoin Cash (BCH) and Bitcoin Satoshi Vision (BSV) offer no investment advantage over Bitcoin on a risk-adjusted basis. Published in 2020, this research examines 17 months of return data and finds that a 100% Bitcoin portfolio outperformed every buy-and-hold combination of BTC, BCH, and BSV when rebalanced monthly. The findings reinforce the theoretical prediction of Metcalfe's Law that a single cryptocurrency network maximizes value.
Risk and Risk-Adjusted Performance¶
BCH and BSV are highly correlated to Bitcoin (0.85 and 0.77 respectively) but comparatively much riskier. Annualized Sharpe ratios for the period November 2018 through April 2020 were 0.8 for BTC, 0.3 for BCH, and 0.4 for BSV. Alpha -- the excess return above a Bitcoin benchmark -- was statistically indistinguishable from zero for both BCH and BSV, while their betas to Bitcoin were 1.24 and 1.74 respectively. Investors in BCH and BSV are exposed to substantially greater volatility without corresponding compensation for that risk.
Up-market and down-market capture ratios illustrate the asymmetry. When Bitcoin rises, BCH gains 1.23 times as much and BSV gains 1.53 times as much. When Bitcoin falls, BCH loses 1.65 times as much and BSV loses 1.79 times as much. The downside amplification exceeds the upside amplification, producing a structurally unfavorable risk profile.
Concentrated Performance¶
A substantial portion of BCH and BSV positive performance can be attributed to just two months out of seventeen: May 2019 and January 2020. For BSV, 78% of positive monthly performance occurred in these two months; for BCH, 49%. By contrast, Bitcoin's positive performance was more evenly distributed, with 41% attributable to the same two months.
From an investment management perspective, it would have been nearly impossible for an investor to beat a Bitcoin-only benchmark without being heavily invested in BCH or BSV during at least one of these two anomalous months. Returns in the remaining months were negative 67% of the time for BCH and 80% of the time for BSV.
Optimal Portfolio¶
An ex-post portfolio optimization among BTC, BCH, and BSV -- using both Markowitz Mean Variance and Kelly Criterion methodologies, with no leverage permitted and monthly rebalancing -- found that the efficient, risk-adjusted optimal portfolio was 100% Bitcoin in all cases. Portfolio efficiency declined monotonically as Bitcoin allocation decreased: 100% BTC produced a Sharpe ratio of 0.77, while 100% BCH produced 0.26 and 100% BSV produced 0.35.
Diversification is beneficial when assets are uncorrelated and return expectations are positive. In the case of BCH and BSV, returns are highly correlated to Bitcoin, and return expectations are neutral to negative. Diversification into BCH or BSV would have likely caused harm to a systematically managed portfolio.
Network Effects and Competition¶
These empirical findings are consistent with the theoretical framework established in the research on why Bitcoin dominates. Network economics dictate that a single network maximizes value for all participants, and any fragmentation through hard forks destroys value. The BCH and BSV hard forks split users from the Bitcoin network, producing competing coins with smaller user bases and therefore lower Metcalfe values -- a mathematical tautology that manifests as inferior risk-adjusted returns.