Bitcoin Case Analysis

Skylar Bingaman Investments LLC

MEMORANDUM

TO: Valued Client

DATE: April 21, 2020
FROM: Dan Nickerson
SUBJECT: Getting Rich on Crypto – Bitcoin Investment

The factors surrounding my recommendation to purchase or not purchase bitcoin stem

from specific calculations derived using the Microsoft Excel Solver function. This formula uses
four different variables listed in Appendix 9 to calculate what specific weights should be applied
to each investment. While manipulating an incremental increase in standard deviation from eight
to twenty percent, the Sharpe ratio reached an optimal point when the standard deviation struck
14.34%. With an expected return of 69.371% and a Sharpe ratio of 4.8, the optimal portfolio will
definitely include Bitcoin. If you were to continue with the previously diversified portfolio, by
referencing Appendix 1, you would only expect a return of 4.87% with a standard deviation of
5.44% making your investment way too risky when compared to how much you can gain or lose
on your overall return.

The composition of the current portfolio is to allocate specific weights to each sector and
subsector of investments such as equities, fixed income, real assets and crypto. In reference to
Appendix 2, the weights change quite drastically. The results speak for themselves; the
annualized returns of each ETF increase by a sufficient amount, but the standard deviation
remains nearly the same across the board only increasing by a maximum of 0.09%. When
comparing them to Appendix 1: there is a clear benefit between adding Bitcoin into the mix
instead of neglecting it from the portfolio. The new portfolio shown in Appendix 2 optimizes
each ETF to earn the highest return while also keeping risk in mind. For example, Treasury Bills
are completely removed from the portfolio because of their low expected return. Chipping away
at the less profitable ETFS, such as taking away 4.4% of the portfolio from T-Bills, allows for
Bitcoin to consume a greater portion of the portfolio and yield higher returns.

Bitcoin is most definitely a long-term investment. Just from analyzing the price increase
from $275.67 on March 2nd, 2015 to its price of $11086.40 on March 2nd, 2018: there is no valid
argument in which you should pull out early when such large capital gains are earned over time.
Although Bitcoin tends to fluctuate in value in a daily or weekly sense, its continuous rise in
value over the long-term is a strong characteristic to help persuade you to keep this in your
portfolio for an extended period of time. Furthermore, Strauss mentioned that “Bitcoin remains
relatively independent of the traditional pressures such as end-of-quarter reporting, company
performance, and institutional confidence of public stakeholders, which often distorts markets.
Bitcoin provides an excellent hedge against potential downfalls of traditional assets and is a
distributed, open source project with no centralized organization or authorities overseeing its
governance.” (Strauss, 2019). Bitcoin can be used as a hedge to minimize risk of traditional
trends in the stock market while also earning strong and consistent gains over time.
 Bitcoin is an asset in the idea that you can buy and trade them with the goal of it rising in
value, and you as the investor will turn a profit. It is a currency with the backing of how it can be
used to purchase certain goods. But, the purchasing power behind it is limited. A commodity like
gold or silver can also be used to make tangible goods such jewelry but Bitcoin exists only
online in which you can not make a product strictly derived from a ‘digital currency’. In
reference to our portfolio, it is used as an asset because we are purchasing it strictly to see our
original investment increase monetarily.

Although Bitcoin set a limit to the total number of coins allowed in circulation at a cap of
21 million, the price will continue to rise exponentially for the foreseeable future. “Bitcoin
pricing is influenced by factors such as: the supply of bitcoin and market demand for it, the
number of competing cryptocurrencies, the cost of producing a bitcoin through the mining
process, the rewards issued to bitcoin miners for verifying transactions to the blockchain,
regulations governing its sale, and the exchanges it trades on.”(Bloomenthal, 2020). Not only
does the price of Bitcoin rely on demand based on how investors perceive its value, people are
also able to mine Bitcoin themselves and earn rewards from doing so. On that note, “The bitcoin
protocol allows new bitcoins to be created at a fixed rate. This can create scenarios in which the
demand for bitcoins increases at a faster rate than the supply increases, which can drive up the
price.” (Bloomental, 2020). Since there are currently about 18.1 million Bitcoins in circulation as
of December 2019, this continuous mining by the masses of our tech-savvy population provides
that Bitcoin has at least another century before it is able to reach its cap and to level out in
volatility. “The latest price spike has been credited to signs that Wall Street companies plan on
bringing their financial heft into the market.” (Popper, 2017). Bitcoin was originally being used
by those attempting to acquire a currency that is not regulated by the government for the use of
black-market transactions. The recent implementation of Wall Street stockbrokers adding this
cryptocurrency into portfolios has made the value skyrocket due to its tempting tremendous
returns.

Bitcoin has been a valiant driving force in the cryptocurrency industry ever since it came
out in 2009. “The first real-world transaction happened in 2010 when a bitcoin miner bought two
pizzas from a Papa John's in Florida for 10,000 bitcoins”. (Edwards, 2018). This being the first
official Bitcoin transaction being used as currency, if the same 10,000 coins were still owned by
the miner, they would be worth 2.756 million dollars. Just from “the fall of 2017, the price of
bitcoin began to rise. In October of that year, the price broke through $5,000 and doubled again
in November to $10,000. Then, in December, the price of one bitcoin reached nearly $20,000.”
(Edwards, 2018). With such large increases in price, there is an inevitable bubble that will have
to pop. Even so, by continuing to hold assets in Bitcoin, you will be able to oversee this bubble
as one of the many peaks and troughs of this currency in which the future profit is inevitable. In
the future, Bitcoin will continue to rise in value and not only be used for black-market activities,
but actually continue to be implemented by multiple types of investment firms in countries all
over the world. As previously mentioned, Bitcoin does not follow traditional stock trends, in
which this cryptocurrency can be used to offset stock market dips during economic recessions
and end-of-the-quarter crunches. I see Bitcoin as an evolving asset that will provide continuous
returns with more and more exchanges being completed day-by-day.
 References
Bloomenthal, A. (2018, January 29). What Determines the Price of 1 Bitcoin? Retrieved from
https://www.investopedia.com/tech/what-determines-value-1-bitcoin/#citation-1
Edwards, J. (2018, April 16). Bitcoin's Price History. Retrieved from
https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp
Popper, N. (2017, December 8). Bitcoin's Price Has Soared. What Comes Next? Retrieved from
https://www.nytimes.com/2017/12/07/technology/bitcoin-price-rise.html
Strauss, R. (2018, September 19). Should You Invest in Stocks or Bitcoin? Retrieved from
https://www.thebalance.com/should-you-invest-in-stocks-or-bitcoin-4121151