Bitcoin Risk Premium Is Not Directly Observable
This is where applying traditional finance concepts to crypto becomes more difficult.
For stocks, analysts can estimate expected returns using earnings, dividends and future cash flows.
For bonds, contractual interest and principal payments provide another valuation anchor.
Bitcoin does not generate conventional corporate cash flows.
There is therefore no universally accepted number called the Bitcoin risk premium that traders can simply look up.
Researchers estimate different forms of crypto risk premium using historical data, derivatives pricing, volatility, factor models and other methods, but the result depends heavily on the model being used.
Bitcoin’s large historical returns should also not simply be interpreted as its risk premium.
A historical return is what happened, while a risk premium is what investors expected as the excess return over a safer benchmark.
A risk premium is the compensation investors expected or required for bearing risk.
Those are related concepts, but they are not interchangeable$BTC
This is where applying traditional finance concepts to crypto becomes more difficult.
For stocks, analysts can estimate expected returns using earnings, dividends and future cash flows.
For bonds, contractual interest and principal payments provide another valuation anchor.
Bitcoin does not generate conventional corporate cash flows.
There is therefore no universally accepted number called the Bitcoin risk premium that traders can simply look up.
Researchers estimate different forms of crypto risk premium using historical data, derivatives pricing, volatility, factor models and other methods, but the result depends heavily on the model being used.
Bitcoin’s large historical returns should also not simply be interpreted as its risk premium.
A historical return is what happened, while a risk premium is what investors expected as the excess return over a safer benchmark.
A risk premium is the compensation investors expected or required for bearing risk.
Those are related concepts, but they are not interchangeable$BTC